May 21, 2020
Consumer Credit Expert
If you take an informal survey of people struggling to manage their finances as adults, they’ll probably have one thing in common. Disregarding any socioeconomic factors, there’s a good chance they had very little personal finance education as children.
It’s not surprising that 36% of college students have managed to rack up some amount of credit card debt. For a young adult that doesn’t fully understand how credit works and what can go wrong if you aren’t careful, a credit card is an invitation to overspending.
That’s why it’s so important to introduce your kids to basic personal finance topics at a young age. The more knowledge and experience they have before leaving the nest, the better equipped they’ll be to make responsible decisions and set themselves up for success.
How to Teach Kids about Credit
Handing a credit card to your kids with no further guidance can be a one-way ticket to massive debt. Before you hand your child a piece of plastic, it’s important to explain how credit works.
Start by showing your own credit card and loan statements. Take a physical copy and highlight the monthly payment, interest rate, remaining term length and total interest paid. When a mortgage or car loan bill arrives in the mail, open it with them. If you track your total debt, let them see how the numbers decrease as you make payments.
Personal stories are the best way to instill a healthy sense of caution. Share your own credit mistakes so they understand how easy it is to mismanage debt. If Mom and Dad can screw up, so can they.
You can talk about the time you racked up a $5,000 credit card balance that took years to pay off, or how missing multiple student loan payments decimated your credit score. Talk about how these decisions impacted your life, like forcing you to get a second job or move to a smaller apartment.
Let Them Practice with a Debit Card
Teaching your kids to responsibly use credit is a lot like teaching them any potentially dangerous activity. Before they can earn access to the real thing, they need to practice with something less risky.
Greenlight produces a debit card for children, designed to give parents more control than a traditional debit card. Parents can dictate the spending limits and choose which merchants are authorized for purchases.
Children under 18 can also open a bank account with a parent and get their own debit card. Pick a bank that has a mobile app so kids can check their balance or view statements on their phones.
A debit card is like training wheels for a credit card – it can give kids a firm understanding of the basics without the danger of falling down.
Make Them an Authorized User
For non-adults, the only way to gain real experience with credit is by becoming an authorized user on an adult’s credit card. This is the next step for parents to take after their child has proven themselves with a debit card.
After adding your child as an authorized user, they’ll receive a credit card with their name on it. Depending on the card provider, you may be able to set a spending limit on the card to prevent them from racking up a balance you can’t afford. Some card companies have no age restrictions for authorized users, while others require the child to be 16 or older.
Becoming an authorized user can help your child establish a credit history, but it can also potentially hurt their credit score. If they spend more than you anticipate, it could increase your percentage of utilization. Your credit score will drop if you can’t afford to repay the full balance right away.
Explain how much your child is allowed to spend on the card and what they can buy. Should the card only be used for emergencies or can they use it for gas, clothes and movie tickets? Set boundaries ahead of time and check in every week to make sure they’re being respected.
Teaching your child how to use credit responsibly is like teaching them to drive a car. Yes, it’s scary, time-consuming and potentially expensive. But they need to learn, and best if they learn from someone they trust.
Ready to make a plan to reach your credit goals? Schedule a free credit analysis with a Financial Renovation Solutions credit consultant today.