As parents, we want to give our kids as much of an education in finances as possible so that when they enter adulthood, they’re empowered and ready to move forward as responsible consumers. While we can’t cover all the bases and we certainly can’t predict the future in a country that’s still struggling from an economic stance, there’s still a lot we can be sure they know and understand. Here are three tips every parent should be teaching their little ones.
Part of the 2009 CARD Act made it illegal for credit card companies to solicit college students, plus, it put into place provisions that requires college students to be able prove they can repay the debt. It’s helped, but credit card companies are still managing to market their products to these young adults. This is one more reason why a strong foundation in financial credit is so important.
Know Your Credit Report
It sounds simple, but the best tool for proper credit management is understanding our credit reports. This is one way parents can make a significant difference in their child or young adult’s life. Help them understand the various considerations. Explain to them how risk is defined in this context and if you’re comfortable, use a copy of your own credit report, which you can request for free once a year. While you’re at it, brush up on your own skills. Not sure what those codes mean on a report? Search out the answers together.
Length of credit history, the differences in established credit and new credit, the differences in revolving credit and fixed credit accounts – all of this is crucial. Show them what the account aging symbolizes, what the various coding means, the difference in high balance and current balance and how all of those factors play a role in the ultimate credit score. Also, explain the purpose of the three credit bureaus and why all three are necessary.
It’s also crucial for young people to understand why all of this is important. Our credit scores and histories now are about much more than determining how much interest we pay on credit cards. These days, they determine how much we pay for insurance and can sometimes even be a determining factor in whether we’re offered a job or a promotion at our current job. It’s likely, too, our credit scores will become even more ingrained in our lives. With a commitment to strong financial habits, it won’t matter how our histories permeate other aspects of our lives – a great credit report ensures that. Make sure they understand this and have a healthy approach to proper money management.
Finally, it’s important for kids to understand we can’t always “just write a check”. The hardest thing for most young people to grasp is why we shouldn’t always give in to our whims. That jet ski we want today might not even interest us by the time summer rolls around again. It’s about controlling our impulses and acknowledging the benefits of resisting the next big iPhone release or handbag. Every decision they make today will surely affect them for many years. If they understand that those decisions, provided they required some type of credit approval, will stick around for at least seven years, they’re better able to approach it with a healthy appreciation and perspective.
Thinking you want to introduce your teen to proper credit management? Try a prepaid card. While this won’t do anything to kick start their credit history (prepaid products are not reported to the credit bureaus) it can be a powerful teaching tool. Choose a card with low rates and an online account management system so that you can monitor your teen’s spending. This type of responsibility will show them how important it is to add funds, maintain a budget, feel the repercussions of any irresponsible purchases or to feel the burn when they’ve spent their money and then actually needed it for something else.
One of the most important lessons we learn occurs the day we spend our last $100 on shoes or tickets to a concert and then have a tire blow out two hours later, only to realize we don’t have the funds for that new tire. Of course, the sooner you begin these teachings, the more time you have step in as a parent to get them back on track (and to buy their new tire).
Bottom line is kids are going to learn something – whether it’s good financial habits or those that have serious repercussions. It’s up to us, as parents, to ensure they don’t continue making those same frivolous mistakes well into adulthood. Instilling those good habits today can make a significant difference in the quality of life, at least from a more materialistic approach, for the rest of their lives.
How did you teach your kids about money? If you’ve had your own credit problems, has that served as a good “jumping off” place to teach your children what not to do? Often, that’s a great place to start. Share your story with us.