Talking to your kids about money can be one of the most challenging conversations to start as a parent. Young children understand counting money, and that money is used to pay for purchases, but determining what age to introduce the concept of credit to kids can be difficult.
I have found that introducing age-appropriate money concepts as early as possible helps build a solid foundation. We recently started giving my 4-year-old niece a weekly allowance, and she is learning how to save, spend, and give using her allowance money. All of the adults in her life, myself included, have made major mistakes when it comes to credit, so it’s important to all of us to teach her and her younger sister responsible debt management habits early.
Let’s discuss why we should teach kids about building credit and how to introduce these topics in ways they understand!
How to Explain to Your Kids the Importance of Building Credit
The second your child turns 18, the aggressive credit card offers will start getting pushed onto your kids and the marketing professionals in charge of creating these offers are smart. If you don’t educate your child on the dangers of carrying heavy credit card debt, the world will. And that’s the last thing your child needs, so it’s up to us as parental figures to do the teaching.
Smart Habits to Teach Your Kids How to Build and Use Credit Responsibly
- Lead by example. Show your kids early on that plastic cards aren’t “magic” that have unlimited money. Teach kids about money first and show them that spending money means you don’t have it anymore. Then, show them that cards are attached to bank accounts that have money in them. Next, teach them about credit cards by example.
- Talk about credit scores. Tell kids what a credit score is and how adults are graded like with a report card from school. The components that make up the adult report card (credit score) is payment history, monies owed, length of credit history, types of credit used or owed on, and how many accounts have been opened or used recently. Have a walk through of paying bills with your kids and let them see the process of paying bills.
- Add your kid as an authorized user. Make sure your child is mature and understands that running up credit card bills that they can’t pay is irresponsible. This is a major teaching opportunity and you can use a prepaid card to start the education until you feel they are ready to use the credit card responsibly.
- Consider using rewards. Offer your kids incentives for positive credit card usage and on time payments. Credit card companies offer money back for purchases so let your kid make decisions on how to spend those rewards.
- Loan your child money. Give your kids money in the form of an allowance weekly and allow them to borrow a larger sum of money to make a major purchase with a little bit of interest attached to the loan. Sit with your child to make a budget of their allowance and split the money between the debt, savings, giving, and spending until the debt is paid off. Make the payments manageable and the interest payments relatively low. This real world scenario can help kids learn early how to pay off debts and manage their money.
What Not to Do
- Don’t give a kid a credit card and expect them to learn as they go. Teach them to only use the credit card if they can afford to pay it back. Budgeting is a great tool to teach before encouraging a teen to have a credit card.
- Don’t expect the world to teach your child about credit. Big credit card companies prey on young adults and convince them to rack up credit card debt that they can’t pay which can lead to lifelong money problems.
- Don’t add them as an authorized user before they are mature enough to handle the responsibility. Age is just a number and doesn’t mean that a kid is ready to have a certain level of responsibility. Monitor your child’s spending habits and have open conversations with them about their spending. Be open with them about what you spend money on and why. This helps teach goal setting and leads them by example.
- Don’t encourage impulsive spending. Nine out of ten kids said that they would spend $100 bill on candy or goodies which indicates to financial experts that kids are being programmed from a young age to be consumers (credit: CNBC).
- Don’t allow children to watch programs or movies with messaging that’s contrary to what you are teaching your child about money, credit, and responsible spending. Some shows aim to create consumer driven behaviors in kids and nurture negative thinking about money without parents realizing what their kids are being exposed to.
How to Set a Good Example
Kids as young as 3 are capable of learning about money habits so teaching kids that credit cards aren’t free money is a key step. One example that can be used is a library book. A kid can check out a library book and not pay a fine as long as it’s returned by the due date but will have to pay a fine if returned after the due date. A credit card works in the same way.
Resist impulsive buying. Set an example to your kids that budgeting for purchases and only spending money that you have is the best way to manage money. When paying with cash, explain to younger kids what each coin or bill means and how to count change.
Teach kids what wants and needs are and how to make decisions on each. Patience is hard enough for adults but even harder for kids because impulse control can be challenging to learn. Once you have maxed out the credit card, it’s hard to get approved for a higher limit to make further purchases in the event of an emergency.
Focus on the benefits of having a good credit score and not just the downsides of having a lower credit score. Teach kids that credit can be used as a tool to receive incentives, build credit history, make investments, improve savings, and focus on long-term growth.
- Credit limit: The maximum amount of credit issued by a lender to a borrower
- Credit card balance: Total amount of money owed by a borrower to a lender on a credit card
- Authorized user: A person that has permission to use a credit card account but is not responsible for paying the bill
- Impulsive buying: Consumerism behavior that involves making a purchase that was unplanned; generally an emotional purchase or made under stressful circumstances
- Credit score: A three digit number assigned to a person that identifies their ability to repay debt; used by lenders to determine if a borrower is likely to repay money lent out based on past history
- Interest: Cost associated with borrowing money; fee paid for borrowing a financed sum of money from a lender
- Credit report: Comprehensive look at credit history, spending habits, and repayment history that indicates a borrower’s ability to repay a lender if money is lent
Books for Parents to Learn About Teaching Your Kids About Credit
Here are some of our favorite books to help you teach your kids about credit. Check out our entire kids’ money books library for parents for more recommendations!
All About Money. This workbook is a homeschool-approved book on business, economics, taxes, and basic money principles. Encourages kids and parents to find answers by offering productive prompts and thought-provoking questions. Targeted at kids over 10 years old.
Kyng & Kyren’s Generational Wealth Building Activity Book. Featured on CNN, Good Morning America, and Fox Business. This book is meant for parents and kids to work together to build generational wealth by educating the next generation on basic financial money management habits, including credit.
The Plastic Rectangle: A Children’s Book about Money (The Shape of Parenting). Written for small children by a mom that is working to educate kids and parents on using credit cards responsibly and personal financial management. Parents that have read the book cite the author’s ability to convey ideas in ways that kids understand and can relate to.
The Survival Guide for Money Smarts: Earn, Save, Spend, Give (Survival Guides for Kids). Focused on earning, spending, saving, and giving for kids in a responsible way that teaches life skills like delayed gratification, goal setting, self-esteem, choosing charities to give to, and making good financial decisions. Practical advice helps kids learn how to thrive rather than just surviving.
The Kids’ Money Book: Earning, Saving, Spending, Investing, Donating. Updated version of the original book that includes life skills such as credit management, budgeting, entrepreneurship, investing, and charity. Reviews cite clarity with teaching kids how to manage their allowance and use debit or credit cards to maximize their money in various ways like incentives from credit card usage.