5 Ways to Teach Your Kids About Credit

Talking to your kids about finances is important and necessary to help them build better money habits. Luckily, finance has become a more common topic in many families today—according to data collected by Bank of America, 83 percent of parents are talking to their kids about money, while only half reported having similar conversations with their own parents back in the day. There are plenty of age-appropriate money topics to bring up to your kids at every stage, and if you have teens, it's never too late to start teaching them about credit. Talking to your kids about types of credit cards and how to use them correctly will help them build credit and spend responsibly.

"It's important to teach your kids about credit early on, because establishing good credit takes time," says Erin McCullen, head of consumer deposit products at Bank of America. "Building credit from a young age through responsible habits can help pave the way for major purchases and life moments, since credit impacts future living arrangements, the ability to purchase a car, and even employment opportunities."

Here are ways you can teach your kids about credit so you can set them up for financial wellness and security down the line.

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Explain how to build credit and use a credit card wisely.

First things first: Explain how credit cards work and how to use them correctly. It's important to teach your kids that a credit card isn't just a piece of plastic that can buy them things they want—explain that there are consequences for not making payments on time or in full.

"Lenders stand to make big money from fees and interest, which can lead to bills much higher than the cost of the initial purchase," says Monica Eaton, certified financial education instructor and author of children's book Money Plan. "That's why it is important that kids understand that the decision to use credit can have long-term financial consequences."

Talk to your child about the importance of spending within their means, and making payments as soon as possible so they don't get bogged down with fees and high interest rates.

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Talk to them about what makes up a credit score.

Explain to your kids what a credit score is, and how it is determined by their payment history, how much money they owe, length of credit history, the types of credit they owe, and the number of recently opened accounts.

Eaton says that of these factors, payment history is most important, and makes up 35 to 40 percent of your total credit score. "Kids should know that it's important to pay their bills on time every time, even if they can only pay the minimum balance."

Kids are visual learners, so walk them through your next credit card payment, suggests money-saving expert Andrea Woroch. Show them different charges and credits in your account to help them get familiar with the whole process.

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Add your child to your credit card as an authorized user.

If you feel your child is ready, add them as an authorized user to one of your credit cards. This will help them build good credit through your existing credit history, while also getting a feel for using a credit card for occasional purchases or emergencies.

"You often see college kids who never had experience using a credit card or talking about credit at home with their parents getting into financial trouble and racking up high balances," says Woroch. If your child does make a mistake with purchasing something that you didn't approve of, use it as a teaching moment—they will get the hang of it eventually.

You can also start off with a prepaid card like Greenlight to get them used to having their own card. This card has an app that can be used to make instant transfers, track usage, and will help your kids budget and spend within their means since it's a debit card.

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Lend your child a small amount of money and have them pay it back.

To get used to the concept of managing a loan, lend your child some money ($100 is a good start) and have them pay you back. Come up with a formal payment plan together that your child can stick to. If they have trouble with payments, encourage them to come talk to you on ways they can make it up, such as paying double the next time.

The idea is to get your kids used to managing payments and communicating with their creditors. "All too often, adults will run into issues and avoid their creditors," says Sebastien Brault, CEO of Wingocard. "In reality, a proactive approach and open dialog can resolve the issue—creditors would rather you talk to them than ghost them."

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Offer rewards and incentives for responsible credit use.

Just like credit card companies offer rewards for positive credit card management such as points and low interest rates, reward your child when they show responsible card usage. "Acknowledging your child's positive credit management will make them feel good about money and influence healthy financial behavior in the future," says Woroch.

This can be a bonus in their allowance, or if they earned rewards through a credit card they're using, let them choose how to redeem it.

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