Russell Ward Finance Writer
Credit can be a tricky concept to explain to your kids – when they can’t see it or touch it, then the idea of credit might not make sense. Persistence is key because helping children understand the basics about borrowing and lending money early on will help them handle their finances and make better choices later.
While your kids might already understand some of the basics when it comes to their money, here are four ways you can teach them about credit and help avoid unnecessary future mistakes.
1. Teach them what the word ‘credit’ means
They might have seen you use a credit card or mention the home loan so sit down with your kids and explain what credit actually means. Explain the principles behind earning money, borrowing it and paying it back. Tell them about the different types of debt – good and bad – and what to look out for as they navigate the credit world before they reach the age where they become inundated with credit card offers and loan deals.
2. How to choose amounts to borrow
Educate them on how to choose the right amounts to borrow when the time comes. Let them make a small purchase for something they want and then teach them how to pay you back for the item. Talk to them beforehand about how much they can afford to repay based on their income (E.g. allowance). Another option is to help create a budget for them – show them how to make payments, how to save over time, and how to make a purchase from their allowance. By taking these baby steps with them, you’ll instill good practice habits when it comes to tracking the outstanding balance, monitoring their savings, and making timely and regular payments until their debt is paid.
3. Help them understand interest
Credit is not just about borrowing and lending money, it’s also about the interest to be paid on the credit. So, while it’s important to teach your kids about borrowing to achieve their goals, you also need to teach them about the costs of borrowing and how the interest rate and accrued interest is the way that credit is paid for. It’s also key to impart on them the fact that interest is based on time periods and longer you have debt, the more total interest you will pay.
4. Explain what a credit history is
At this stage in their young lives, a credit history might not seem relevant but it’s still worth explaining what it is and how a good and bad credit history can impact on future borrowing applications and decisions. Demonstrate that they need to try to build a healthy credit history by keeping a check on their money and ensuring they don’t overdraw their accounts at the bank. When they are old enough to start using credit cards and taking out loans, they can improve their track record by using credit responsibly and carefully.
About the author
Russell Ward is a professional business writer who has been published in The Huffington Post, The Telegraph, CEO Magazine, Global Living, Mamamia and Thought Catalog.
Please note that this article is not financial product advice and does not take into account any person’s individual objectives, financial circumstances or needs.