Teaching Children Smart Credit Lessons

Most parents play an active role in teaching their children skills that will serve them well throughout their lives. This may range from educational instructions, such as reading and writing, to life skills, such as cooking or knowing how to check the oil level in a vehicle. However, when it comes to teaching their children financial skills, several studies show that many moms and dads hesitate to educate their sons and daughters about money management and credit.

Failing to teach children the basics about credit cards, loans and debt may not benefit them when they reach adulthood and apply for their first line of credit.

Although some schools are adopting financial literacy programs to better teach kids money lessons, these initiatives are still in development. As a result, young adults who lack knowledge about interest rates and fees, different credit types and how their spending impacts their credit reports and scores may inadvertently make credit mistakes that could have been avoided.

When it comes to having a conversation with kids about credit, there are a few areas parents should touch on to help them understand the basics.

First, it’s important that children know how these products work. This involves explaining what interest rates are, and how and when they are applied. Individuals should also discuss the difference between revolving and non-revolving debt, minimum payment requirements and penalty fees. Adults who carry credit cards can also use their statements as a teaching tool, as lenders are now required to disclose how long it will take borrowers to pay off the remaining balance if they only make minimum payments. This may serve as a valuable lesson to kids about not charging more money than can be paid off in full each billing cycle.

Second, adults can also use their own credit reports to reveal what type of information is listed and how lenders rely on the data to make determinations about creditworthiness and rates. This would also be a good opportunity to explain how the details on a consumer’s credit report are used to calculate their credit scores. Many people may not be aware that they have more than one credit rating or do not understand the factors that drive the score calculations. Explaining the behaviors that influence credit ratings may help children avoid common mistakes when they reach the age to apply for a credit card, auto loan or student loan.

Finally, mixing in personal finance guidance, such as budgeting tips and the importance of saving money, go hand-in-hand with credit lessons. Adults can tie in how devoting money to savings on a regular basis and abiding by a budget to avoid unnecessary spending can help individuals avoid becoming reliant on credit.