For most young children, money is a foreign and strange concept, as they just assume their mom or dad are omnipotent and can summon any toy, video game, or sugary breakfast cereal from the ether. But all too soon they’ll realize that money makes the world go ‘round, and we actually need to work hard for little green paper that we then pass on to others when we want to obtain goods or services. Soon they’ll be faced with their own hard lesson in economics, as well, when they have to clean up their room or put away the dishes for a simple allowance, their first foray into owning some of that little green paper themselves (other then when grandma spoils them with a 5-spot when she visits). As they grow, our children go on to form their own unique relationship with money and finances, some of it good and some of it not the best of habits.
So it’s important that we serve our children well by teaching them the basics about money, debt, and yes, even credit score when they are young. The sad fact is that a good number of people don’t learn these hard lessons until they are teens or even in college, when they aren’t making adult salaries yet but still can make some big-time mistakes with credit cards and debt.
Every child is different, so start with the basics about money (like we outlined in this blog) and have several conversations to introduce the concepts slowly and in a fun manner, but with reinforce, repetition, and real-world examples. And when it’s time to talk about the concept of credit score, we suggest introducing it to your child in this simple A-B-C approach.
A
Explain borrowing and debt.
Once you cover the basic concepts of money with your child, it’s time to delve into the topics of debt – particularly important so young adults don’t get into trouble with credit cards and set good habits that serve them well throughout their lives. First, talk to your kids about borrowing money – how when you want to buy big things like a car, a house, paying for college, etc. you can ask for the money from the bank and pay them back every month over time.
Show them a credit card, telling them how it works for bigger purchases but also smaller ones, like at stores when you go school shopping with them. A firm grasp of debt and borrowing is the first key to discussing credit.
B
Break down the concepts of interest and payment options.
Once they understand debt and watch you use your credit card at stores and even write a check to your bank for the mortgage every month, the next step is to develop the subtleties of interest and payments with your children. They may have questions like “Why wouldn’t everyone get money from the bank for everything?” so show them that you actually have to apply to get money from the bank, and often they say “no.” In fact, borrowing money from the bank comes with a cost. Take out a $20 bill and several $1 bills and show them that if they borrow $20, every month they have to pay back $1 to pay off the $20 AND an extra $1 to the bank. That means by the end of 20 months, they’ve actually spent $40. That should open their eyes to the high cost of interest and debt!
Make it a game with your children by taking out the calculator and some coins and pretending you were the bank and they were borrowing, showing them different options and scenarios with interest repayment. Once that’s internalized, you can also show them your credit card statement and the option to pay only the minimum, but how it takes much longer – and costs far more – if you only pay the minimum.
C
Credit score is just like a report card.
The best way to sum up all of this information about credit (which can even be confusing for adults!) is to use the report card analogy. Just like they get a report card at school that rates their academic performance in each subject, we all get a report card from the credit bureaus that “rate” our use of debt. If we’ve turned in all of our assignments on time (pay on time ever month) and did good-quality academic work (used credit and debt responsibly), then we will receive A’s – or a great credit score. Each school subject can be compared to each individual creditor. It’s also important to also show your children what a credit report looks like, perhaps even putting it side by side with a report card, and showing them where there is room for improvement if we only earned B’s or C’s with on our credit report.
As they grasp the main concept, you can start explaining the intricacies of credit reports and scoring, explaining good debt vs. bad debt, and highlighting the benefits of being able to use a credit card, get a mortgage to buy a house, and save money on anything you borrow or finance thanks to your good score.
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Now that you’ve covered the A, B, C’s of credit and debt, you can reinforce the lessons in real life by showing your child that you’re using debt or credit cards whenever you are at the grocery store, buying them some new sneakers, or when it’s time to make your mortgage, car, or credit card payments.
Once they have a basic familiarity with these concepts, the next step is to actually pull your credit report and go over it with them, using the same report card analogy to show them your own grade, and what you could do to improve your credit rating going forward.
