NEW YORK (MainStreet) — How would you like your kids to graduate from college with a 700 credit score? Sound too good to be true? It’s not. In fact, if you start teaching your kids about credit at the right age, you can help them grow up to be financially mature adults with killer credit. Still, many parents aren’t sure how to best introduce their kids to the notion of credit or even at what age to start. So how do you raise your kids to have a healthy relationship with credit?
When to Start?
Ellie Kay, a family financial expert and author of The Little Book of Big Savings, has some experience in teaching kids about money: she's raised a family of seven, including what she calls both born spenders and born savers.
“I’d issue a disclaimer saying that it depends on the kid and the family, but I think it starts around age 7,” she says. This is because this is the time when they usually start to need an allowance for spending. “We always knew a child was ready to learn about credit, because they would ask to borrow money.”
Having Conversations About Credit
“Credit isn’t good or bad, it’s a vehicle to manage or bucket expenses,” says Randy Hopper, vice president of credit cards at Navy Federal Credit Union. He advises beginning to have serious conversations with your kids about how credit works once they enter high school.
“Explain to them how a mortgage works while you help them create a budget,” he says. This is because you can explain that a mortgage payment is just like any other item on a budget. “There’s more to managing a budget than just cash on hand,” he says.
What’s more, Hopper encourages leading by example and including your kids in conversations about your household budget. When they see you modeling appropriate use of credit, they’ll be more inclined to follow suit.
Teaching Your Kids the Value of Saving
“We wanted to teach our kids to develop the habit of not using credit,” says Kay. To that end, their kids had to save up money and delay gratification to get the things they wanted, but couldn’t afford. One of Kay’s daughters wanted an American Girl doll. While she wouldn’t give her the money to buy it, she did encourage saving by offering her a “Family 401(k)” plan where contributions were matched.
Still, Kay points out that, more often than not, when she would check back in with one of her kids four months after they saw something they “had to have,” they had forgotten then wanted it. “That was a really good way to teach them about the dangers of impulse purchasing,” she says.
Banking as a Teaching Method
When Kay’s kids got older, her husband and she got them checking accounts. This not only helped them to monitor saving and spending, it also began to illustrate the concept of credit in a rudimentary way.
“If you spend too much there are fees and penalties associated with that,” she says. What’s more, a checking account almost always comes with a debit card, which got her kids used to carrying plastic in their pocket -- and the budgeting that comes along with it.
Hopper concurs that kids need to get used to the notion of having plastic in their pocket. He believes that around the time that they’re old enough to drive that it’s prudent to make them authorized users on your credit cards. “They might need access to funds for auto maintenance or even just filling up the gas tank,” he said.
Kay’s kids got cards at around 17, which she said was good to allow them to begin using credit in a controlled fashion. “They needed to get approval to use it and we could track everything,” she said.
This has additional benefits beyond just teaching your kids about credit. Kay points out that because of her family’s overall financial responsibility all of her kids graduated college with impeccable credit scores. When you teach your kids about proper credit management in this way, you’re not just giving them the habits they need for the future, you’re giving them one of the best graduations gifts a parent can give -- the gift of impeccable credit.
--Written by Nicholas Pell for MainStreet