5 Ways to Help Your Kids Build Good Credit
My parents taught me many important things growing up: my mom drilled in the importance of manners and taught me how to bake, while my dad showed me how to change a tire and throw a mean right hook. However, there’s one subject that my parents (unfortunately) didn’t focus on very much: teaching me the importance of good financial habits.
I look back now at my teenage and young adult years, reflecting on all the poor financial decisions that I made. I think about how much money I could have saved away – and credit woes I could have spared myself – if only financial lessons had accompanied our allowances. While your children will still make dumb decisions, it’s important to teach them money basics. Not only can you lay down for them a foundation of financial literacy, but you will also set your children on the path to building strong credit from the get-go.
Teach Them to Save
Whether your children are six or sixteen, you can teach them the value of a dollar and the importance of saving. It’s never too early to start. Anytime they earn money from their allowance, get a birthday check from grandma, or start earning a paycheck, let that be a learning opportunity. Show them that some of it can be spent on fun things, but a portion should be saved for a rainy day.
Teach your children to automatically set aside a portion of their income in savings, no matter the source. They will enjoy watching their nest egg grow while also building the habit. Then, when they enter the “real world,” they will already be accustomed to saving for retirement and emergency funds.
Teach the Value of Compound Interest
While your kids’ savings accounts are growing, you can show them the power of compound interest over time. Start this lifelong appreciation at a young age, and your children will grow into adults who save as much as they can, as early as they can. Seeing their money multiply in interest-bearing accounts could be all the motivation your children need to start saving well. Luckily, the concept of compound interest could also save them from a debt disaster later.
If you teach your children the power of interest and how it builds, they can also understand how holding onto debt can be incredibly detrimental. This may deter them as they get older, and as they are bombarded with the temptation of credit cards and frivolous spending. Simply knowing that a $50 “deal” purchased on a credit card could end up costing them much more with interest might be their motivating factor.
Show Them How to Budget
If your children learn how to budget and manage their money early on, they will be less likely to fall into overspending traps as they get older. Teach your kids from a very young age how to manage the money that they have, and only spend according to what they can afford. Since they don’t yet have credit cards or other methods of borrowing, this is a much easier concept to grasp.
Allow them to get a savings and checking account, and show them how to balance a checkbook. Then, as they get to be teenagers, help them to obtain and responsibly use either a debit card or prepaid credit card.
They can then get accustomed to spending with plastic, while still being forced to stay within defined limits. If they spend too much on a debit card and overdraw their account, for example, they will quickly learn the pain of overdraft fees.
Add Them as Authorized Users
If you think your child is ready for their first venture into credit cards, you can gently introduce him or her by adding them as an authorized user on your credit card account.
By doing so, they can start feeling the power of “charging” purchases, while also learning the importance of paying the bill off in full each month. As the primary accountholder, you’ll be able to monitor their purchases, set limits on spending, and even lock the card if necessary. That way, you can let them test the credit card waters with a minimized risk to themselves.
Another great aspect of being an authorized user is that, once they turn 18, they may also start building up a credit history from that account. Certain credit card companies will report to authorized users’ credit reports, allowing them to not only build a positive payment history, but also their average age of accounts and credit limit (credit-to-debt ratio).
When your child is ready to apply for their own accounts – such as a credit card, auto loan, student loan, or even an apartment lease that requires a credit check – they will have a positive, established history already building.
Lead by Example
The most important thing that you can do to teach your children about managing money and building good credit is to lead by example. Talk to your kids about your financial moves and why you make the decisions that you do. Rather than telling your seven-year-old “Because I said no” when he or she begs for a toy, take the time to teach them about the value of money.
Let them know that you work hard for the money that you have. Perhaps it’s not in the budget right now, but he or she is welcome to save up their allowance and buy the toy on their own.
Show your children that you value saving for your future (as well as theirs, if you plan to do so), and talk to them about your choices often. If you are working to pay off debts – such as student loans or your mortgage – sit your child down and show them.
Explain the power of interest and how much “extra” money that line of credit will cost you in the end. Then, do the same with your retirement savings account. They may be astounded to see how money builds in both directions.
Teaching children smart money habits from a young age will help them learn how to spend within their limits. They will feel comfortable and confident in managing their own financial situations, and (hopefully) the idea of overspending, or carrying debt, will feel unacceptable.
Plus, if you start early enough and teach your kids the right lessons, they’ll enter adulthood with established credit, good financial practices, and a nest egg of their own on which to build. And fiscal responsibility is one of the greatest gifts you could give your child.