Teaching your kids how to handle finances is a critical part of parenting. The problem is that many adults were never taught the basics about money. Even those that were may be passing on information that is no longer applicable in times when cash is no longer king and credit rules.
1. You need to use credit.
Many of us grew up with the goal of paying for all of our purchases in cash. This was an admirable and doable goal for many generations, but has become increasingly difficult in the modern era. While many people may pay for smaller purchases in cash, the majority of people will carry a mortgage if they want to own their own home. Even if your kids intend to make all of their major purchases in cash, they are going to need good credit while they are saving. Landlords, insurance companies, and employers are only three of the types of businesses that might check their credit, even if they are not lending them money.
2. How you use credit is being scored.
It is not enough to use credit; you have to use it wisely. Show you kids how credit scores work, explain what it means to have great credit, and how them what prime and subprime scores mean and how those designations can change depending on the type of borrowing they want to do. By showing them how their decisions can impact their credit score, you can help guide them to better decision making.
3. The credit reporting bureaus make mistakes.
Once they understand that their use of credit is being scored, it will naturally make sense to them when you tell them to monitor their credit. This will not only help them detect suspicious activity, but also remind them to check and make sure that things are being reported clearly and accurately. Teach them how to dispute erroneous information or how to use a service to help them with those disputes.
4. Credit is not free money.
The most important thing to teach kids is that anything borrowed on credit has to be repaid. Many kids treat credit cards like free money. One way to show them how a few hundred dollars on a few credit cards can quickly snowball into a mountain of debt is to run a few simulations on an interest calculator.
5. The difference that interest rates make.
While you are at the interest calculator, show them the difference in total price paid for various goods when you can get prime and subprime interest rates. For a home loan, a good interest rate can mean paying hundreds of thousands of dollars less over the life of the loan.
6. You can use credit to make money.
The discussion about credit can be overwhelming and can lead kids to being scared to use credit. Make sure and show them the upsides. If you have a great rewards credit card, show them how making purchases on a rewards card and regularly paying off the balance actually puts money in your pocket. In our home, we have all of our recurring expenses charged to a rewards card, which is paid-in-full each month. Every spring, we get almost $1000 cashback from that card!