Educating your kids on credit is important at every age, but as your kids mature into teens and young adults, it's even more valuable for them to have basic knowledge of how credit will affect them as grownups. Use this worksheet to teach your kids about the importance of credit in their lives.
Why Is Credit Important?
Saving for a car or a house can take many years. Credit allows us to build a financial reputation so that we’re able to borrow money for large purchases and investments with ease. Credit allows you to make those purchases if you do not have the luxury of saving for several years and need to buy something immediately.
Consider your options.
● Save for five years and then buy a new car on your own.
● Buy a new car today and pay for it over time, usually with interest.
Your decision will most likely be impacted by how long you have to plan and save for larger purchases.
Why Are Interest Rates Important?
Interest is the fee that is added, over time, to the total amount of money you owe on a loan. The higher the interest rate, the more challenging it can be to pay off. On the other side, a lower interest rate may allow you to take more time to pay off your debt.
Which interest rate would you prefer?
● Borrow $1,000 with a 3% interest rate and pay $1,002 at the end of the month?
● Borrow $1,000 with a 10% interest rate and pay $1,017 after two months?
● Borrow $1,000 with a 15% interest rate and pay $1,038 after three months?
How much you pay in interest ultimately depends on how high your interest rate is and how quickly you’re able to pay it off.
Why Is Credit History Important?
Lending money can be risky. Lenders look at your credit history before deciding to lend you money.
Who would you loan $10 to?
● Forgetful Fiona borrowed $10 and didn’t pay it back for six months, even though she agreed to pay it back in five months.
● Greedy Greg borrowed $10 and still hasn’t paid it back, just like the last time.
● Charming Charlie borrowed $10 and is paying back $1 a week until it’s paid off, just like she said she would.
You’d probably want to go with someone like Charming Charlie who has a history of constantly paying off their loans.
Why Are Credit Scores Important?
Just like exams and school grades, your credit is evaluated with a score. Credit scores tell lenders how good you are at paying back loans on time.
Typically, the better you are at paying back money, the higher your score is.
● One missed payment can affect your score for 7 years.
● If you have a poor score, lenders may charge more interest.
● If you have a very bad score, lenders may refuse to loan you money.