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 card
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 credit score.
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 later.
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).