It can be difficult to explain the abstract concept of credit to
children, but investing in concrete lessons while they're young can
pay off later. Luckily, parents have tools to help not only teach
those skills, but also allow kids to practice money management.
Here's a three-step plan to teach important financial lessons
before your kids face real interest rates and late fees. It may
just save them from the crunchier side of credit.
Step 1: Show me the money
Financial savvy starts with cash. As soon as a child has money
from allowance, chores or gifts, help her open a bank account. The
abstract nature of money in the bank opens up all kinds of
conversations. Kids are curious where the money they deposit goes.
Reviewing bank statements with children gives you the opportunity
to explain the benefits of earning interest. And birthday checks
from grandparents introduce the idea of other instruments standing
in for actual currency.
Let kids make their own choices about how they spend at least
some of their money. Start with low stakes financial decisions they
can be 100 percent in charge of, such as buying candy. (You can
always make rules about how and when they can eat the candy in case
you have a tycoon on your hands!) Discuss wants versus needs.
Perhaps most importantly, share with them how you use your own
money. Evan Jones, VP of marketing for BillMyParents MasterCard,
suggests involving kids in your budgeting conversations, especially
where it concerns them. "Discuss the reasons they can't go on that
senior class trip to Mexico," he says. "And explain the differences
between a credit card, debit bank card and a prepaid card."
Step 2: Debit now for less debt later
Using prepaid debit cards can acclimate kids to swiping plastic,
but with the constraints of cash. Teach kids to keep receipts and
create a running tally of purchases so they always know the
remaining balance on the card. Children who create the habit of
staying within their means at a young age will be much more likely
to pay off credit card balances every month as adults.
Step 3: Transition to a low-limit credit
One way or another, we're all using credit. It's the norm in
society. Learning how to manage finite resources is a wonderful
skill-whether that's cash, check or debit card-but at some point
your child will be offered credit. Help your teenager open a credit
card account, and then let her make purchases and pay the monthly
statement. Once she turns 18, this will help to build a healthy
The trick with the credit card is to let the teenager make a
mistake or two. If you've instilled good habits with cash and let
her practice with a pre-loaded debit card, she should be ready for
a real credit card.
However, if she's going to make a mistake-better now than
Kids who learn fiscal responsibility at a young age are much
less likely to mismanage their money later in life, but money
lessons go deeper. Teaching your child to live within his means and
make difficult choices is a lesson that transcends any bank
balance. Plus, teaching good financial habits gives you peace of
mind your child won't be calling in a few years ask for a little
extra to cover his overdraft fees.
Lela Davidson is the author of Blacklisted from the PTA (Jupiter Press, July 2011).
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