There was an increase in searches on financial education at the end of the past year. After all, we’ve been through, it makes sense that people are looking for ways to make their money go further and how to create a plan to ensure they are financially stable. We know our clients are familiar with financial 101, but what about your children?
Financial education is not taught in schools, despite how critical it is to a fulfilling life. So, how do you teach young children about financial education? A piggy bank and a chore chart only cover a fraction of what it means to be financially smart. We need to teach our kids about credit cards and the importance of good credit so they know how to use it properly once they get one.
Here are a few tips to teach your young children about credit and credit cards:
1. Start young
8 years is a great age to start introducing your children to credit cards. At this age, they’re more likely to listen to you and if you use age-appropriate examples they will be able to pick up the most important parts. Starting young also improves the chances that they will understand how to avoid financial hardships as they become adults.
2. Explain what a credit card is
They’ve seen you use one so they know it’s a card you pay with but they likely don’t understand how money is actually on it. Explain that your card has a limit set between the bank and yourself and that you cannot surpass this limit. Tell them that anything you pay for using the card is added up and that you owe it back once you get the bill at the end of the month.
3. Stress that it’s not your money
Be sure to stress that it’s not your money. It’s loaned, meaning that you must pay it back. You can tell them that sometimes you it’s not possible to pay the entire bill at once and that in these instances you pay a portion of the bill now and a portion of the bill later.
4. Simplify Interest so they understand that you need to pay the balance in a timely manner
Simplify what interest means so they understand the importance of paying off the bill. Explain that if you pay back the bill in instalments (rather than paying it all off at once) then the financial institution asks for a percentage extra for every dollar remaining. This means that amount you owe can increase the longer it’s unpaid. To avoid paying more than what the item costs its best to pay off the bills at once.
5. Only buy things that you can afford
Remind them that It’s important to not buy things that you can’t afford. Remind them that it’s best to pay the entire bill at once to avoid interest and to watch how much you put on the card. The rule of thumb is to not let your balance be 30% of the overall limit. You can then give them an example too better explain what 30% looks like. If your card has a limit of $100 then you should never have a balance (what you owe) more than $30.
6. Briefly touch on Credit Scores
Explain that credit cards help build what we call a “credit score”, meaning how trustworthy the bank thinks you are for them to loan more money to. Tell your kids that a good credit score helps you buy things like a home and sometimes a car, since most adults need to go through a bank to purchase these. If you have a poor credit score these items could end up costing more.
A good credit score is built by making payments on time and not having a balance over 30%.
If you want to take it a step further you can even get your kids the mydoh app. The Mydoh app and Smart Cash Card make it easy for kids to gain real money skills. You can coach, guide, or just keep an eye on things.
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