As a financial literacy influencer, I believe it’s never too early to start teaching our children about money matters, including the responsible use of credit, building up a good FICO Score. With many adults in the United States falling into debt and credit card problems, it’s important that we equip our children with the knowledge and skills they need to make informed financial decisions.
The very first step in teaching children about money is to give them a basic understanding of its value. Let them earn an allowance by doing chores and make purchases that they will have to save for over time. Allow them to interact with money, handling, counting and making small purchases to give them the feel of its importance. By doing so, children learn to appreciate the value of money and how it can be used for saving, spending, and giving.
Parents are responsible for setting a good example when it comes to financial management. They should lead by example if they want to instill good money habits in their children. One way is to openly discuss what they are doing with their own finances in front of their children without making them feel guilty or ashamed. Admitting that there are financial struggles and explaining the steps taken to alleviate financial stress can help children understand the importance of good money management and the secret workings of being adult.
Teaching the basics of credit can be challenging for parents, especially when sometimes we may be unaware of how credit works themselves. Considering how complicated terms and conditions as reported by 60 minutes, even the most intelligent among us finds it hard to understand rates. For example, a credit card company is allowed to change and increase the interest rates charged on your carrying balance after you signed up, and it is totally legal. A bad decision to cancel a credit card or forgetting to pay a balance can hurt one’s FICO score and make it very expensive later on to get a mortgage.
Credit cards are ubiquitous, and the concept of FICO Score, credit card points collection, using cash instead of credit, the concept of borrowing money can be difficult to grasp for a child. How can we help them have a balanced financial outlook? A good initial step is to help children understand what is FICO Score, purpose of starting and maintaining a good credit score. Also credit cards are not free money, but rather a tool that allows you to borrow money that is to be paid back at a determined period. A good way to explain this concept is by stating that for every purchase, a promise is also taken by the cardholder, that it will be paid back in full, with interest that accrues over time. If they have siblings or friends, two friends can each play the role of a bank issuing credit and another receiving credit and using it.
It’s also important to teach children about credit card interest rates and how carrying a balance can add more debt over time. Inform them that a credit card can be useful for emergencies and planned purchases, points but should be paid back as soon as possible to avoid steep interest rates. Help them choose wisely when considering a bank account, maybe helping them compare options and educate them on fees that a credit card may have while also explaining the benefits of building credit early on.
Lastly, teaching children about money management is not a one time event but a consistent effort, an ongoing process. Encourage your kids to ask questions about money and credit and explain complex ideas such as saving, budgeting, and investing. These life skills can be introduced to kids at any age and they can develop further as they grow older. Having regular discussions about finance and credit with your children can help instill good habits and set them up to be financially sound adults.
In conclusion, teaching children about financial literacy, the responsible use of credit cards, and money management starts with understanding the power tool of money. Like a kitchen knife, it can be used to prepare delicious meals or cut someone. As parents, we should give examples of how we are managing credit, our way of buying things, involve children in discussing family finances. Teaching children that credit is not a free handout and that interest rates can add up quickly is essential.
Encourage them to ask questions, make mistakes about money and make it a goal to continue to help them build their financial literacy skills throughout their childhood and into their adult years. Read books and take courses together on money. I find playing the game Rich Dad Poor Dad Board Game on Rat Race helps understand concept of credit and money.
By doing so, we can set our children up for a better chance getting a mortgage without paying higher interest rates, a more stable and prosperous future, free from unnecessary debt and financial stress.
I am curious to know what you have done? how you are dealing with the topic of money. And if you have adult children, how did you help them understand money and become successful? Share with me your advice especially if your kids are already successful adults. I like to hear from you.
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