Here is some advice on helping your child establish good credit habits for their future.
If we think back to our earliest childhood memories, we'd all have to admit that our concepts about money were far from reality. Money was that funny green paper that Mommy and Daddy gave to people when they got us things. We had no idea where it came from, only that it seemed unlimited and easy to get. As we grew older, we may have started making the connection between money and work, if we received allowances. But credit cards still remained a mystery to us, reserved for those grown-ups who still controlled the invisible money tree we just KNEW had to be around.
As parents, however, we understand perfectly where all our money comes from, and what we have to do to earn it. Credit cards are not magical keys to whatever we want, as we are so painfully reminded every month. Some of us may have even discovered the difficulties of not having enough credit for what we want. Unlike our childhood fantasies, credit is a reality that we must deal with regularly. But how do we help our children start out on the road to establishing good credit histories of their own? Here are some ideas on how to help your own child develop the financial responsibility needed to handle credit in the future.
1. Start teaching financial responsibility early. If you have a chance to explain what that card in Mommy's purse does, take it. Use simple language, but explain that sometimes Mommy doesn't have enough money to buy something the family needs, so this card is like a promise to pay someone back. If Mommy doesn't keep her promise, the other people may not allow her to get anything else. So Mommy only uses her card when she has to, not because she wants a new toy. Children can relate to promises, so establish the idea that credit is like someone trusting you to pay them back when they give you money. If you don't pay them back, they won't trust you as much. Very young children can relate to money easier than credit, so you might explain it in terms of borrowing money from their sister's piggy bank and promising to pay it back when they can. Establish the importance of keeping your word when you borrow money.
2. Older children should be encouraged to spend wisely. If a school-aged child receives a steady allowance for doing chores, he or she should be encouraged to spend within their means whenever possible. This should reinforce the idea of using their available money before resorting to borrowing on credit. If your older child wants to buy a compact disc or a video game, it may be better to encourage them to save their own money for such a purchase. However, if your child needs a new bicycle or other high-ticket item, they may get discouraged at the idea of having to save so much money at a disappointingly slow rate. You may consider buying the bike for them, with the idea of taking some of the money out of their allowance for a certain amount of time. This may be the best way to introduce the idea of credit to a growing child. If the benefits of the bicycle outweigh the loss of some allowance money, then they may understand the decision making behind credit. Buying something less useful under the same conditions will demonstrate that not everything expensive is worth the cost of repayment. This exercise should encourage financial responsibility in your school-aged child.
3. Help your teenager get established. As paper routes and allowances give way to part-time jobs and babysitting, your child will need your financial guidance more than ever. Explain everything you have learned from your own credit experiences, both good and bad. Show them your bills and explain the idea of carrying balances and minimum payments. Teenagers should be able to understand interest rates, and how a $15 sweater bought on credit may become a $25 sweater later. When the time is right, you may want to take your teen to a local department store to fill out their first credit card application. If you are comfortable with the responsibility, co-sign the application. But first discuss the role of a co-signer, so your teen won't be tempted to run up excessive credit under the belief that you will pick up the pieces. Once they have opened a charge account, encourage them to establish credit by buying an affordable item and paying it off quickly. Overdue payments should not be tolerated, although oversights do happen. Any punishment for intentional abuse should not prevent your child from earning the money needed for reparations. Teenagers want to experience a little financial freedom, so try not to criticize every purchase they make. If you have instilled the proper respect for money in them since childhood, they should still know when to say when. Many teens dream of owning their own cars, which will inevitably lead to loan situations for parents. If you feel comfortable co-signing a car loan, then do it. If not, explain your reasons compassionately and matter-of-factly. This sort of financial impasse may arouse some strong emotions, so stick to your guns until the tensions have eased. Set a reasonable goal for agreeing to a loan situation, or offer an alternative driving solution. Avoid making finances a devisive issue during your child's teen years. Once you've established a healthy respect for credit and money in your child, the rest should be left in their hands.
