4 Ways to Teach Your Kids about Credit

Introducing your child to the basics of credit and borrowing money, before they find themselves at risk of becoming in debt, can assist them to manage their finances and make better choices later on in life. This is particularly relevant at the moment with the influx of online shopping and also buy now pay later schemes like ZipPay and AfterPay. It can be very enticing for them to press ‘pay now’ without understanding the consequences.

Here are 4 ways you can teach them about credit and help them avoid future mistakes.

1. What does credit actually mean?

Your children might have seen you use credit cards at the local shop or talk about the loan for a car or even your home. It is important to take time to sit down with your children and explain what credit actually means. Talk about the principles behind earning money, borrowing it and of course, paying it back.

2. Choosing the right amount to borrow

It’s important to teach them early on to borrow only what is appropriate for their needs.

A good idea is to make a small purchase for something they want and allowing them to pay you back for the item. Help them set a budget to make the payments and show them how to save and pay amounts over time to make the purchase from their allowance. Doing this will help teach your kids how to track the outstanding balance, how to monitor their savings plus make payments on time until the debt is paid in full.

3. Credit history….what is that??

While it won’t seem relevant to them now, your kids should understand how a good and bad credit history will impact on future borrowing applications and decisions.

They can begin to build a healthy credit history by carefully monitoring their money and ensuring they don’t go overdrawn at the bank. Once old enough to start using a credit card, they can continue to build a positive track record by using credit responsibly – they need to know that every credit move they make will affect their history.

4. What about interest?

It’s one thing to teach your children about borrowing money to buy their first car or even to go on a holiday, but it’s also important to help them understand the concept of interest.

They need to realise that borrowing isn’t without its costs and that interest is how this service is paid for – and that it will increase over time as they take longer to pay off the full amount. Kids need to carefully understand how interest will impact on their debt.

Teach your kids about these key aspects of credit and once they have to make their own borrowing or credit commitments in the future they’ll have the knowledge they need to make sound and secure financial decisions.

If you would like more information or to discuss please don't hesitate to get in touch.