Money Talks - Big Y® World Class Market®

Teaching Your Teenagers About Credit

While the stuff of credit and credit ratings may seem to be firm inhabitants of the adult world, your kids are going to get there. Remember how it happened to you? So ask yourself this: If opportunity rewards the prepared mind, why not prepare your kids for what’s to come? There’s little doubt that the world runs on money and money runs on credit. Knowing how to make the rules of credit work for you instead of against you is an essential skill for your young ones - perhaps on par with knowing how to stay healthy and safe. And, in today’s financial environment, with media horns blaring the notes of loans, refinancing, credit and paybacks, it’s the perfect time to sit your teens down and have “the talk” - the money talk.

Money Talk is a Good Investment

Your teens probably have some experience with managing money. Perhaps you’ve given them an allowance or they may have some part-time income from a summer job. The first thing to discuss with them is the concept of credit. Explain that if they want to buy a house or car or take a loan for college (use some personal examples here of when you obtained credit) they will have to borrow money and that they will have to pay a fee to do so. Explain that borrowing is like renting money, and you have to pay the money back on a schedule and on time. Then explain that if they pay the money back on time, they will have a good credit rating. But if they don’t pay the money back on time, their credit rating will begin to go down. Then explain this basic fact of life: A good credit rating makes it easier to borrow money and a bad credit rating makes it harder and more expensive.

Family Banking

Now, will they understand this? Here’s how you can explain
it to them. It’s bold, but it will be one of the best money lessons you can teach - loan your teen some money. Yes, just like you’re the bank. How much is up to you, but make sure it’s enough that your teenager will have to adhere to an aggressive payment schedule to get a good credit rating from you. Maybe you loan your teen fifty dollars with instructions to pay back five dollars a week for 10 weeks. Let them spend the fifty dollars in any way they want. Now the fun (and education) begins.

Over the 10-week period, rate your teen as he or she repays the money. Keep a record of timely payments and amounts. At the end of the 10 weeks, if your teen has followed all the “family financing” rules, let them know their credit rating is top notch and they may take another loan - then allow them to do it. On the other hand, if they’ve been late paying or under paid, lower their credit rating and only make smaller loans available with some interest attached.
It may sound crazy, but a real world example - with the safety net of it being a parental teaching moment - will absolutely drive home the idea of loans and credit with your teen. In fact, you may be one of the parents who catch yourself saying, “I wish someone had done this with me when I was a teenager.”

Credit Worthy Tips

Of course we know that keeping a good credit rating also depends on having developed a lifetime of sound personal money management skills. And although you can’t expect teenagers to learn everything at once, it’s still a good idea to expose them to some of these financial housekeeping tips:

Both are here to stay, so teach your teens how to use credit and debit cards, properly. Get them a card or let them use yours (with limits) and track their usage. Go online with them to show them what they’ve spent, their balances, interest rates and the like. Again, it’s the real world examples that make the most impact.

This one may be hard to do so take a deep breath and dive in. Have your teen sit with you while you pay the monthly bills. Discuss what you’re paying, how much and why. There’s no better time to talk about interest rates, financing, car loans, mortgages - all the financial concepts that your teen will need to understand in the years ahead.

Credit can be a great tool, but it can also bring you down if you borrow too much. This lesson needs to be demonstrated to teens, who are forming their financial habits by watching you. So, from time to time, talk about the need for restraint and not living beyond your means, for not borrowing too much. And this means not buying your teen everything he or she wants. It’s better to teach them that saving up for what they want is better than borrowing to buy.
The bottom line on helping your teen develop good credit habits and money management skills is giving them the proper tools and opportunities to practice what you have taught them. Then, when financial responsibility becomes a fact of life, and not just an exercise, your teen will be prepared to make smart choices.