Raising healthy and productive children requires setting a good example, and financial issues are no exception. Establishing responsible habits early will help to ensure your kids’ understanding of credit reports, debt, and everything in between. Read on for some creative ways to open the door to financial freedom.
- Practice your analogies. When it comes to teaching any subject, it’s all about perception. Translating credit terms into relatable scenarios will help your kids understand the importance of good credit. For example, if you have a child in elementary school, compare a credit score to a report card and a credit report to a year-end review. Explain that paying debt on time results in good scores, while paying late or overspending results in bad credit scores. If your child is older, use their mathematical knowledge to your advantage. If your high school kids have taken economics, discuss the pitfalls of supply and demand as it relates to credit. Consider the following scenario:
Steve is a 17-year-old baseball fan who hopes to buy a ball signed by Pete Rose. The ball costs thousands of dollars, most of which Steve cannot save while working a part-time job. He was approved for a credit card, and decides that maxing it out with a 22 percent interest rate is the best solution.
Discuss this scenario with your kids and ask them to calculate the final cost of the ball based on time and interest. Ask them if the high price of the ball is really worth the greater cost in the long run. Point out the potential damage of maxing out a credit card as well, and explain the possible effects on their credit report.
- Compare the good and the bad. A common misconception about debt is that it’s all bad. While overextending is certainly ill-advised, talk to your kids about how debt can work to strengthen their credit report. Borrow another analogy, comparing a line of credit to taking a test at school to prove their knowledge. Similarly, consumers must prove their positive habits in order to raise their credit scores.
- Put thoughts into action. Learning is doing, and putting your lessons into tangible action will help your kids learn more about credit reports and their components. Rather than repeat the same old lecture, why not:
- Open a savings account or line of credit. If your child is old enough to have a job, she is old enough to save money and build a credit history. Allow her to open a savings account and even a line of credit in the form of a secure credit card. Teach her how to balance a checkbook and review her spending accordingly. Talk about debt utilization ratios and how to spend in a way that will help her credit score (e.g., no more than 25 percent of the credit limit). While this concept may not apply to secure credit cards, the message will carry over when unsecured debt enters the equation.
- Illustrate with phone service. If you child is in her early teens, consider using a prepaid phone to illustrate responsible spending. Allow her to use a cell phone at her own discretion, thereby learning how to stretch limited minutes. If the minutes are gone within a few days, chances are she will change her tactics in the future.
- Breaking down debt. For elementary school children, allowing them to share expenses is an effective way to illustrate value. For example, if your son wants the latest video game, offer to pay half and have him work for the remainder by doing chores around the house. Pay him minimum wage and allow him to see how long the saving process takes. Not only will he appreciate the game more, he will understand the burden of debt and repayment.
- Have some faith. Learning about money, credit reports, and managing debt is a foreign concept to many adults, so give your kids some room to breathe and absorb the information in front of them. While they may run into mistakes early on, the learning process is as vital as the outcome. Talk about credit early. Your kids’ self-sufficiency depends on it.