Parents wear a lot of hats. You may be a cook, taxi driver, cheerleader and reader of bedtime stories. Yet, one of the most important roles you play in your children’s lives is the role of teacher. You teach your kids to drive, tie their shoes, fold their clothes and hopefully you teach your kids how to best manage their finances and credit.
The way you handle credit and money can shape your children’s financial future, as they’ll likely replicate your practices. If you’re looking for a great place to start, here are some suggestions:
Lesson #1: Never Charge More Than You Can Afford to Pay Off Right Away
Kids don’t understand how credit cards work until you explain the process. They see you swipe a credit card at the gas station or grocery store, but the implications of how purchases, interest and repayment schedules work are concepts you’ll eventually have to break down on their level.
I’ve found that the best way to teach this particular lesson is by example. Let your kids swipe your cards and even sign the electronic signature pads. Then talk to them about what just happened and why it’s important not to make a charge on a credit card unless you have the money to pay it off when the bill comes.
If you’re putting off a large purchase because you don’t have the money to pay it off, explain why you’re waiting. When your child is old enough, you can even add him or her to your personal credit card as an authorized user to teach these lessons in a more hands-on way.
If you’ve raised your kids to believe that credit card debt isn’t normal, they’ll be less likely to make credit card mistakes when it’s time to manage their own accounts.
Lesson #2: Your Credit Reports Are Your Responsibility
Credit reports are the basis upon which your credit scores are calculated. If you want to take out a mortgage and purchase a home, finance a car or qualify for a credit card, the condition of your credit reports will make or break your ability to achieve those goals. They are the single most important attribute when you apply for a loan or credit card.
As you review your credit reports, talk to your kids about why it’s important to do so. Better yet, show them your reports and the red flags you’re looking for as you review them.
You can’t afford to sit back and assume your credit reports are accurate. Credit reporting errors and identity theft are simply too common. If you want to maintain healthy credit and be confident in your ability to qualify for a loan when you need it, you have to create a habit of reviewing your three credit reports frequently, even monthly.
As you review your credit reports, talk to your kids about why it’s important to do so. Better yet, show them your reports and the red flags you’re looking for as you review them. For me personally, I’ve always used the “this is my report card” analogy because it makes sense to my son. He understands that how I manage my credit accounts shows up on these credit reports and represent my “grown up” credit report card.
Lesson #3: Never Co-Sign
Aside from mortgage loans, where dual incomes from two people may be needed to qualify, it’s best to remain credit independent. In fact, you should never co-sign for a financial obligation if you can help it. This is an important lesson to teach your child because we are naturally predisposed to want to help our loved ones.
Co-signing for debt has the potential to hurt your credit scores because you become equally liable for payment of the debt. It can make it harder for you to qualify for financing on your own. And in all candor, there’s a reason you’re being asked to co-sign and that reason is whoever is asking can’t get credit on his or her own, which should be a warning in and of itself.
The Value of Credit Education
There are measurable advantages of teaching kids about credit and money. This Federal Reserve study found that students exposed to financial education had higher credit scores and lower delinquency rates compared to students who didn’t receive the same financial education.
Taking the time to teach kids important lessons about credit while they’re young can be life changing. It can help them build a solid foundation that can help them throughout their entire adult lives. It will also save them a ton of money in interest fees that they won’t have to pay.