As a parent, you want to bestow wisdom upon your child. Your kids look up to you, so it is important to educate them about the crucial things in life. One of the essential things to talk to your kids about is finances. Money and credit are always a good thing to educate your child about. The more you teach them now, the better off they may be when they are adults. With the access to the Internet, there may be misinformation out there that might steer your kids in the wrong direction. By taking the time to properly sit them down, you will be paying dividends.
As your children begin to grow up and start becoming more responsible with their own finances, it may be time to entrust them with their own credit card. Before you sign them up for a card, you should educate them about the rules and regulations that go along with having this level of responsibility. By starting with a few of these topics, you can send them down the right path:
How credit works
When starting to explain how to use a credit card, you may want to start from the ground up. Even if your child has their own bank account, it wouldn’t hurt to explain to them what credit is and how it works. Simply explain to them that using a credit card is like borrowing money. A credit card issuer will give them a card and they can use it to make purchases, but they will then have to pay those purchases back. A general explanation such as this can give them the frame of mind that credit is not the equivalent of money. After starting with the basics, you can begin to explain about more specific things.
The basics of a credit score and credit report
The next item on the docket is explaining a credit score and a credit report. These two aspects are important to talk about because they monitor the state of someone’s credit. A credit report is a documentation of your child’s credit card history. This can be everything from how many open lines of credit they have or their delinquent marks. The added benefit is that each year, your child is allowed a free credit report from the three major credit bureaus –TransUnion, Experian and Equifax. A good tip to bestow upon your kids is spacing out how many times they access the reports. By getting them at different parts of the year, they will be able to make sure their credit is healthy.
Along with a credit report, you should give them an overview of what a credit score is. This three digit numerical expression of your credit is important for your child because it will be a determining factor if they want to get loans in the future. If your child has a low credit score, they may have a tough time with their finances.
Helping out at first
When deciding what type of credit card your child will be getting, you have a number of options. Starting off, kids may have trouble building their credit and you may be worried they will use the card like money and blow through the credit limit. A very common option for first-time credit card users is to be an authorized user on a parent’s account. With this option your child will be able to use their own credit card, but it will be for your account. When you use your card to build credit, you will also be building credit for your kid at the same time. Discuss with your credit issuer whether they offer this option. This can be a great starting point for your kids.
Making payments on time
Making payments on your credit card is one of the most important things you can do. It’s usually made once a month and shows up on your credit card statement. It is important to tell your kids you must make these payments each month. Not only will it help decrease you or your child’s balance, but it also contributes to maintaining a good credit score. Missing these payments can result in your credit card being charged expensive fees and your score being docked a few points. If your child just got their first credit card, this may be one of the first things you should educate them about.
