Financial literacy isn’t the same thing as common sense. Americans don’t have a strong understanding of money, and it shows with poor credit scores, poor cash management and heavy debt loads.
A study done in 2012 by The Organization for Economic Cooperation and Development (OECD) revealed that only 1 in 10 U.S. students scored highly on a financial literacy exam while nearly 18 percent didn’t even register as understanding the basics.
It’s more important than ever to teach your kids about money and credit to spare them the difficulty of waking up one day and realizing that their finances are spinning out of control. Having a solid grasp on debt, credit, loans and financial products before they even attend college can go a long way and lead to financial success at an earlier age.
Some financial lessons you can start teaching at a very young age, while others might require a higher level of maturity. Regardless, here are the top three things parents can do to help their kids understand credit.
1. Explain the Idea of Credit.
Credit might seem like a complex notion, but there are ways to explain the concept in an easy-to-grasp manner. Credit is like borrowed money that must be paid back with a bit extra in thanks.
If you’re out shopping and your child wants something but doesn’t have enough money, that’s a perfect opportunity to explain what credit is and how it works. Tell them that credit allows him to purchase this toy today, but that they have to pay it back by a certain time with a little extra for interest. If they don’t want to pay more than the toy is worth, they can wait to buy the toy once they have enough allowance saved.
For a teenager, buying a prepaid debit or credit card for him is the best way to help acquaint him with credit. If they have a job, they can even link the card to their account. Co-signing for a real credit card might be too big of a responsibility at that age — not to mention how nonpayment will affect your credit score should it occur.
First Financial offers Student Checking to students who live, work, worship, volunteer, or attend school in Monmouth or Ocean County, ages 14-23.* For more information on how you can open a Student Checking account today, click here to visit our website.
2. Why It Pays Off to Save Up.
As anyone with a kid knows, when a child wants something, it has to be right this very second. They could pass by a toy that they have never seen before or a snack they want while you’re out and suddenly they need to have it right then and there, no exceptions. If they don’t have the money for it, you can bet they’ll go straight to the bank of mom and dad. When that happens, you should take the time to explain the cost of buying it now versus saving up for it later.
Explain to them that they can have it now if they want it, but that they will be borrowing money that needs to be paid back, and that they will actually be paying more for it — thanks to interest — in exchange for getting it now. Let them decide if it’s better to save up money to buy the item later. If explained properly, you might be surprised by what a child chooses.
First Financial’s unique First Step Kids Savings Account is designed specifically for young people up to age 18 with a focus on education and fun!** Open an account online today by clicking here!
3. That a Credit Score Should Be High, Just Like Test Grades.
Adults understand what a credit score is and how it affects their lives, but you don’t want your child to develop poor money-management habits only to discover how important good credit is once rejected for a loan. However, relaying that information into kid-talk can be a challenge.
The best way to go about it is to relate it to a point system. If they are in school, this lesson is much easier to relay. Explain that everyone gets awarded points for how well they use their credit. If they use too much, it goes down. If they don’t pay on time, it goes down. Let them know that a bad score means that they won’t be able to borrow as much money and that they have to pay even more interest to do so. A low enough score might mean that they can’t buy anything on credit at all.
This can be a good opportunity to explain your own finances with your children. Let them know how your car or house gets bought and paid every month. Explain to them that a good credit score makes it cheaper to do that, while a bad one makes it more expensive and potentially impossible. For the teenager in your household, allowing them to obtain a small credit line, like a gas credit card with a limit of $250, will let them build credit without putting them at serious risk.
Children taught at an early age to understand financial concepts like credit will be able to use critical thinking skills as adults when it comes to money. They’ll remember the lessons they were taught as kids, especially if you discuss these concepts on a consistent basis.
Establish a rule that allows your kids to use credit to buy things and assign a scorecard for them. When you make it something that they can actually see with their own eyes, they tend to follow it more closely and understand the concepts better. As they grow up, they will know how to avoid high interest and splurge spending on credit cards. They’ll be able to make better decisions, and understand that nothing is for free and that anything they use now will have to be paid back later.
*A $5 deposit in a base savings account is required for credit union membership prior to opening any other account. All personal memberships are part of the Rewards First program and a $5 per month non-participation fee is charged to the base savings account for memberships not meeting the minimum requirements of the Bronze Tier. Click here to view full Rewards First program details, and here to view the Tier Level Comparison Chart. Accounts for children age 13 and under are excluded from this program.
**As of 12/12/2012, the First Step Kids Account has an annual percentage yield of 0.05% on balances of $100.00 and more. The dividend rate may change after the account is opened. Parent or guardian must bring both the child’s birth certificate and social security card when opening a First Step Kids Account at any branch location. Parent or guardian will be a joint owner and must also bring their identification. A First Financial Membership is open to anyone who lives, works, worships or attends school in Monmouth or Ocean Counties.
Original article written by Daniel Cross of GoBankingRates.com.