Credit is supposed to be a tool that adults can use to earn rewards, make major purchases like cars or homes, and build savings or investments for the long term.
Recently, the debt in average American households has been creeping higher and higher with a household average of $90,460 and this is putting a lot of stress on families due to loss of income during the pandemic as well as rising inflation.
Kids can learn about responsibly managing credit before you’re old enough to have credit of your own by playing educational games or having conversations with parents/adults about their experiences with credit.
Let’s jump in!
Why Building Credit is So Important
Credit allows adults to buy houses or cars, rent apartments, get jobs, and make big purchases. A credit score is a three digit number that rates how healthy an adult’s relationship with credit is.
Questions that lenders will ask themselves when looking at a credit application for new credit include:
- Are bills paid on time?
- How much credit is being used?
- How often is credit being used?
- What type of credit is being used?
- How long has this adult been using credit?
All of these questions are answered by a credit report which is a full picture of how an adult manages their credit but not how they manage their money. Credit reports do not show if an adult has money in their checking, savings, retirement, or other investment accounts.
They, also, don’t show if the adult owns a business and how that business is doing financially.
Building credit takes time, discipline, and patience as well as consistent, on time payments.
How to Build Credit
The best way to start to build credit is to take out small loans or credit cards, charge small amounts often, pay the cards off in full every month to avoid paying interest to the lender and make payments on time for the loans.
Look for loans that have low interest rates or that you can offer collateral on so the lender is more likely to lend you money and at a lower interest rate than if you applied without collateral. Forms of collateral include savings accounts, paid off vehicles, or assets that hold value.
After 3-6 months of on time payments, you can call the lender and ask for a credit limit increase based on your on time payments and regular use.
Check your credit report every 6 months to make sure there are no charges on your report that aren’t yours. Identity theft is when someone uses your name and social security to take out credit in your name but use the money themselves.
Credit reports will, also, show if a bill was not reported to the credit bureau correctly and that needs to be disputed with the credit bureaus. There are 3 credit bureaus: Equifax, Experian, and TransUnion.
Credit cards are different from debit cards but it doesn’t have to be complicated.
What Are Credit Cards?
A credit card is a plastic card issued by a lender that can be used to buy products or services from businesses that accept credit cards as a form of payment. It looks like a debit card but is not tied to your bank account.
A debit card spends money out of your bank account. A credit card spends the lender’s money and you have to pay them back plus interest if the balance is not paid off in full every month.
Parents are a great resource to ask for help and information about credit and how best to manage it responsibly.
My sister made the mistake as a young adult of taking out 21 retail store credit cards because she didn’t understand her credit and how credit cards worked.
Each card was maxed out within a month of opening the account because the cashier at the store told her that she could get a discount on her purchases if she opened a store credit card.
The monthly payment was affordable for her so within a few months of turning 21 years old, she had thousands of dollars of debt and a huge closet full of name brand clothing that wasn’t worth what she had paid for it.
It has taken her 6 years to fix her credit that was wrecked by all of those store credit cards and she has now paid off every card and closed most of them. We are focused on teaching our children about how to manage money and credit responsibly so they never face the same challenges that we have.
Please talk to your parents about their history with credit and money management. Learn early how to use credit to your advantage and not to the advantage of the lender.
How to Ask Your Parents to Help You Learn About Credit
Parents can be great sources of information on how to use credit responsibly. Many adults have made mistakes with debt and it’s a powerful lesson to learn from other’s mistakes.
Credit cards aren’t available for kids until you turn 21 and for good reason. If credit cards are not used and paid off immediately, this can lead to huge amounts of debt with high monthly payments that kids can struggle under.
However, parents can set kids up with debit or prepaid cards that you can learn to manage yourself and parents can add money to the account in the form of an allowance. Kids can sit down with parents to make a budget for the money and then be allowed to make purchases on your own.
The good thing about prepaid cards is that there is no possibility of overdraft. Once the money is gone, it’s gone. This teaches financial literacy and how to be disciplined with spending money.
- Credit: a contract between a borrower and lender to borrow money and pay the amount back at a later date with interest
- Credit scores: a three digit number assigned to adults that represents their ability to pay money back based on past behavior and payment history
- Lender: an establishment that lends money to borrowers
- Credit application: a request made to a lender by a borrower asking for credit
- Credit report: breakdown of credit history issued by a credit bureau
- Interest rate: amount of money charged to a borrower based on a percentage of the amount borrowed
- Collateral: an item of value that is pledged as security to ensure repayment of monies borrowed
- Credit limit: maximum amount of credit given from a lender to a borrower
- Debit card: card issued by a bank that is attached to a bank account used to make purchases
- Credit card: card issued by a lender that is attached to a credit account used to make purchases
- Prepaid card: type of credit card with money loaded onto it used to make purchases
- Overdraft: an overage to cover monies used by a bank account owner if not enough money is in the bank account to over purchases
Books and Games to Learn About Credit
Here are some of our favorite books and games to learn about credit as a kid. Check out all of our credit games for kids recommendations for more ideas!
- Finance 101 for Kids: Money Lessons Children Cannot Afford to Miss by Walter Andal. This book is aimed at kids ages 8-12 and is meant to be used with parents that can help explain some of the concepts. Lessons targeted include: what money is, saving/investing, what credit is and how to manage it, what currency is, what the stock market is, and other money fundamentals.
- Finance 102 for Kids: Practical Money Lessons Children Cannot Afford to Miss by Walter Andal. This is the follow up book to Finance 101 and goes more in depth on managing credit and using it to build wealth, spending wisely and living within your means, and ways to protect your money.
- Kids Under$tanding Money by R Edward Norwood. Aimed at kids 10 and older, this book discusses money management habits that kids can build to prepare you for adulthood. Lessons learned include: opening a checking and savings account, balancing a budget, using credit wisely, and how to pay for college.
- Cat Insanity Interactive Game. This 5 minute game allows kids to choose which type of cat they want to “adopt” and each has an interest rate associated with it. The higher the interest rate, the faster the cats multiply and the faster you have to try to feed the cats before you run out of food (money) and room to house the cats (the compounded interest).
- Shady Sam Loan Shark Game. This interactive game teaches about shady business practices of loan sharks and payday lenders. Playing the game “rewards” for predatory behavior by offering trinkets to put on your virtual desk. Customers enter and tell you about their loan needs and it’s your job to do the math and figure out how to get the most money out of their unfortunate situations. This game is beneficial because it can help kids understand that monthly payments aren’t the only factor when choosing which loan is right for you and that certain life situations aren’t a great idea to take out money for.