Teaching Your Kids About Money and Credit

Teaching your child about money can help set the foundation of their financial well-being. When you introduce the ideas of saving, budgeting and debt, you can empower your children to make informed decisions when they earn a living of their own.

Tips to help your child build positive money habits

You can teach your children about money at any age, and it doesn’t have to be rigid, course-like work. You don’t need to delve into taxes for them to appreciate the power of saving and proper money management. Do your best to make it relaxed, low stakes and enjoyable.

They’re likely getting influenced about money outside the home, whether it’s from their peers, people they follow on social media or just by casually observing how you talk about money around them. Here are some ways you can help your child build positive money habits:

Talk about money

You don’t need to talk in depth about your specific finances, but the more your child knows how money and the general economy works, the more prepared they are to make better money decisions. Additionally, you can speak broadly about the mistakes you’ve made and what you learned. This helps them realize that it’s OK to make a financial mistake. Everyone does, and you can recover from financial hiccups. Making small mistakes early and recovering from them can help you avoid making the big mistakes later when stakes are high, like when making big purchases like a home or car.

Build a budget

Creating a budget can be a challenge when children are young and don’t have regular money coming in, but it’s still a useful exercise. It becomes especially important as they head to higher education or the workforce. They may have to budget for limited means during their time at college or need to know how to manage money coming in from working . We’ve created a guide on how to budget and save at the same time. No single budget looks the same — everyone has different needs.

You can practice budgeting with any regular household expense. For younger children, showing them your budget for grocery shopping and allowing them to pick items and help with the math can be a great starter activity. As your child prepares for more independence, you can help them build an actual budget based on estimated expenses. You can help them write out their expenses whether they’re textbooks for school, gas for their car or saving for a first apartment.

Practice saving

Delayed gratification is tough at any age, but it’s useful for a healthy outlook on money management. This practice can be done at any age. If your child has a particular thing they want to buy, help them understand how to save for it in equal increments.

Ask them:

• How much does it cost?
• How much money do you have and how much can you or do you earn?
• Knowing this, how long will it take you to save up for it?

Many children, especially if they’re too young to have a job of their own, may not have the opportunity to save their own money. If you’re able, consider a regular allowance. It allows children to receive a regular “income” and practice using it responsibly. An allowance doesn’t have to be contingent on completing household work.

There’s no perfect time to start giving allowance, but it’s best if you have a plan and clear communication about why you’re giving it and what it can be used for. Do you have expectations for how they will spend it? Are there certain products or experiences they can’t use their allowance for? Having a plan can help make this a more productive, fun exercise for you and your children.

Setting realistic, attainable goals is one of the cornerstones of building a budget and successful money management. Help nudge them down the right path with tools and strategies to help them achieve their goals. Some people budget and save using an envelope method. For adults, this may just be some mental accounting in which we compartmentalize where money is going. But giving children physical envelopes with goals written on them can help them visually understand how to separate their money. You can also help them set up their own savings account. Many banks and credit unions offer accounts for children. These accounts can allow you to digitally track their goals and often come with special features like financial education and waived monthly fees. The ultimate goal is to help children understand how to manage limited resources and multiple goals.  

Explain how credit works

Credit is essentially an agreement to borrow money. Fees and interest are often included in that agreement. For children and young adults, financial topics can feel abstract until they become relevant and timely. For example, for young children, understanding how the credit economy works may be too much. Though, you can talk in a basic sense about how people will borrow money just like they may borrow things. Importantly, when discussing financial products and concepts, use terms and purchases they connect with. If you have a teenager, showing them an auto loan calculator can be a powerful way to show the impact of interest on the total price of a car.

How children can build a credit history

You can’t apply for credit until you’re 18, but you can help your child get a head start on building healthy credit. Here are a couple options to consider:

Consider adding your child as an authorized user

Depending on your credit card account, you may be able to add your child as an authorized user. If the card issuer reports the account history to authorized user’s credit reports, your child will inherit the history of that account. This can help them get a jump start on building their credit,but know that they will also inherit negative items like missed payments.

This is a good opportunity to show them what a good payment history looks like and explain why it’s important. Your payment history is one of the most important credit score factors. If you don’t want to show them the specifics of your credit report, check out this interactive guide with examples.

Credit cards for teens

Your child can apply for credit at age 18. Whether it’s a credit card or a car, applying for credit is a big decision for a young adult. Getting started with credit early can help build credit, but there are of course the risks of overspending and the consequences that come with it.

Talk with your child about credit cards, their risks, and how to manage them properly. They may be enticed by credit card offers with enticing rewards and perks.

Even with a limited credit history, your young adult may be eligible for a secured credit card. A secured card works similarly to a regular credit card. But with a secured credit card, the cardholder provides a deposit up front. That deposit becomes the card’s credit limit. The cardholder can then have a balance of up to that amount. They can’t use the deposit to pay down the balance. Though, if the account is closed in good standing, the deposit is refunded back to the account holder.

Your young adult may be eligible for a variety of cards, like secured cards, even if they have a thin credit file. Some lenders offer credit cards for college students or credit cards with low credit lines. Credit cards can be used to help build a credit history, but if they’re not practicing healthy financial habits, balances can balloon and paying back the high-interest debt can be a serious stressor.

Go over the credit score factors with your young adult. While a credit score is only a single measure of healthy credit, it’s important to know so they can make the best decisions for their credit health as they engage with the credit economy. Here are factors that make up a VantageScore® 3.0 credit score:

• Payment history       
• Credit usage
• Credit depth
• Recent credit