Teach kids about credit and loans to prepare them for adulthood. Although I believe in debt-free living, using credit is fine as long as it is used responsibly.
Teaching your kids about credit does not mean discouraging them from using it. Instead, teach them to use it wisely and not get into debt. Help them stay in the mindset that their credit cards are paid in full every month and be mindful of where they are spending their money.
How do I teach this concept to my kids? Below are a few tips that might help.
Be your kid’s creditor to teach them about credit and loans.
If your kids are not old enough to have a credit or debit card, be their creditor. This is a good way to teach your kids about credit.
How many times have you been at the store and your kid wants to buy something? Maybe they do not have enough money in their bank account to go to the movies with their friends. This is an opportunity to teach them about credit.
Sometimes I loan my kids money. We put the amount owed on a shared spreadsheet and I show them how much they will owe me if they do not pay me back in full in one month.
Yes, I charge them interest. Not one of my kids ever paid me interest. They do not like owing me money and they do not want to pay more than they borrowed so they pay it off pretty quick.
You can also do this if they want to purchase a bigger item. My son wanted a new phone that cost more than we were willing to spend. We paid the amount we agreed to and we loaned him the difference.
In this situation, we gave him 90 days to pay us back with no interest. You can set whatever criteria work for you but keep in mind that the goal is to teach them about using credit responsibly.
Talk to your kids about credit and loans
Teaching kids about credit includes discussing loans. As they reach young adulthood they will be bombarded with loan solicitations.
Student Loans
In my sons senior year of high school he received so much mail with offers for student loans. Student loans are a huge percentage of debt among young adults. The requirements are not strict for student loan approval which makes it even more attractive.
When these offers arrive, talk to your kids about them. Show them how much they will actually be paying for this loan. Explain all of the pros and cons of the loan.
If you don’t know, then it is a good exercise for you to go through as well. Better yet, go through it together before deciding if getting a loan is the best choice. I am not telling you whether or not to get a loan. I’m merely suggesting doing your research.
Auto Loans
Similarly, be careful with auto loans. At some point, your kid will want to purchase a car. I encourage my kids to buy an older car and pay cash for it. Not only is the car cheaper, but the insurance costs are as well. On the other hand, a new car will have fewer problems that may result in less repair costs.
However, do your kids want or even need a loan? Again, review the terms of the loan. Clearly show your kid how much they are actually paying for the car after all interest payments.
Remind them what happens if they miss a payment and ask yourself if you are willing to co-sign for this loan. More than likely your kid will not qualify without you.
Are you ready to add this to your risk? Again, this is a decision your family will ultimately make. Just be sure to think about it before jumping in.
Kids and building credit
If you are concerned about your kids building credit, you can do this with a credit card. They can have a secured card with a low limit and once they prove responsibility, increase the limit.
You can also add them as authorized users to your card and set your boundaries at home. Yes, a loan can help build credit but is that worth the debt owed? Weigh the pros and cons and decide what is best for your family.
Ultimately, we want our kids never to need a debt-free journey. Teach them early to use credit wisely, budget their money, and to live at or below their means and they will be financially successful.
How are you teaching your kids about credit and loans? I’d love to hear your ideas.
Some related articles about kids money management:
Thanks for reading!
Stay Balanced,
Jill