On the surface, credit cards seem pretty straightforward: You use your card to purchase items and then pay the balance at the end of the month. But as many of us have learned the hard way, using credit can be all too easy, and you can go into debt quickly.
While many parents teach their older kids about credit cards, introducing the concepts of interest or what carrying a balance really means right after you hand them that piece of plastic might not land as deeply as you’d hope. Teaching your child before they have a credit card how and when to use credit and giving them real-world examples to illustrate those lessons can help them get a head start on their financial journey.
Listen to this week’s episode of the rich & Regular podcast and read below for ways to introduce the concept of credit and credit cards to younger children.
Understand how credit works.
Much of what kids learn about finances comes from watching their parents use money in the real world. Many parents offer lessons along the way, but children learn primarily by watching and then repeating the behavior they witness. If you’ve ever had a child pick up swear words just by listening to adult conversations, you know what we’re talking about.
But learning about credit is different. While a teenager probably understands the concept that you have to pay back what you borrow, a younger child watching you use a credit card might think that you just swipe and receive a product or service, almost like free money. They don’t see you pay the bill, or carry a balance that keeps you from doing other things with your money. That’s why it’s important that younger children have an understanding of what credit is and how it works.
It’s not free money.
The fundamental principle of a credit card is that you aren’t using your own money, which can be challenging for kids to grasp. You’re taking out a loan from the credit card company for each purchase and promising to pay that money back in the form of your monthly payment.
Explain to your child that while you don’t have to pay any money right now for whatever you purchased, the company is keeping track of all of your charges. You need to pay them back by a specific time, or else you will have to pay extra money in the form of interest, fees and penalties.
Know the difference between a credit card and a debit card.
If you’ve ever reached for your debit card at a gas station and accidentally grabbed your credit card instead, you know that the two cards can look almost identical and are often issued by the same bank. It’s easy enough for the grown-ups to get confused, so it makes sense that a child might not understand that the two cards perform different functions.
Show them both cards in your wallet and ask them to describe how to tell them apart.
Make sure your child knows that while a debit card provides access to the money already in your account and is similar to using cash, the credit card lets you buy things under a specific dollar amount (your credit limit), and you can’t go over that amount.
Discussing credit cards with your child is also a great time to introduce the concept of interest. Depending on your child’s age and the questions they’ve been asking, you may have already discussed compound interest and why that’s a good thing when it comes to your investments.
Use this time to talk to your child about how interest can work against you when you have credit card debt or other types of loans.
Show your child your credit card website dashboard and help them determine the annual percentage rate (APR) on your credit cards. From there, and if their math skills are far enough along, ask them to help you calculate how much extra money you would have to pay in interest each month by carrying a balance.
Give them real world examples.
Having hands-on examples and real numbers to look at can help them cement the idea that credit is a helpful tool, but you don’t want to get carried away by it.
For older kids, it might be beneficial to let them play around with the balance pay off calculator that many card sites now offer, so they can see how much things actually cost when you use a credit card and don’t pay off the balance.
Remember to keep the message positive and age appropriate. This lesson isn’t meant to scare or shame your child for their wants; it’s to show them that using a credit card looks and feels really easy, but that there is much more to it.
Credit is a good tool.
Helping your child understand that credit is a valuable tool but not something that should drive their life is a valuable lesson. While they shouldn’t be afraid of using credit, instilling a healthy respect for its pros and cons can help them develop a good relationship with credit that will serve them well in the future.