By Kate Ashford
As a parent, you're responsible for teaching your children about a wide range of topics, from table manners to tying shoes. If you haven't included financial literacy for kids among the many teachable moments you share every day, then it may be time to add it to your parenting playbook. After all, credit is a big part of how we live in the world today — from shopping online to seeking employment to buying auto insurance, credit history often influences spending habits and lifestyle. That means it's essential to include credit education when teaching kids about money, before they learn tough lessons about what credit is (and is not).
"Now is the time to teach them how to use credit properly," says John Ulzheimer, author of The Smart Consumer's Guide to Good Credit. "If you pound this into their heads at this age, they won't go into their first credit card relationship confused about what to do with it
You can start introducing the basic concept of credit as early as kids start to understand money. This is especially true if you use a credit card to conduct daily transactions, when your kids are likely to see credit in action.
For kids who are just getting the hang of dollars and cents, credit is a very abstract idea. And for many of them, it seems that Mom and Dad hand over a piece of plastic at the store in exchange for food and other things.
It's worth taking the time to narrate what you're doing when you're spending money this way. "Whenever I was out shopping and I used a credit card, I would explain what I was doing," says Beverly Harzog, a credit and consumer expert and author of The Debt Escape Plan. "I would tell them the bill was coming later and I would pay it in full."
Just as you talk to your children during the buying phase, it's also helpful to loop them in when you pay the bill. Show them your credit card statement when it arrives, and point out items you bought together. Ask if they recall that you made these purchases using the credit card. "Say, 'Remember you were with me when I bought those shoes?'" Harzog says. "'Here is the bill.'"
As you're looking at your credit card statement with your kids, make a note of the Annual Percentage Rate (APR), or interest rate, on the card. Explain how the APR works — that it measures the interest rate over the course of a year. Talk about what will happen if you only make the minimum payment on the card. Discuss what happens if you pay late: You'll incur a fee, your interest rate might go up, and your credit score could go down. "I make sure they understand that if I miss the due date, there are repercussions for that," Harzog says.
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Discussing late payments is a perfect pathway to talking about what credit history is — and how your behavior with credit cards affects it. This is essential, since your credit history can affect everything from your auto insurance rate to securing a mortgage. "You have to make it interesting, and you have to show how it's relevant to their lives," Harzog says. "If there are late payments, it doesn't look good, and it doesn't make you look responsible."
Related: All About Consumer Credit Reports
Without a clear explanation of why you're using credit, credit cards may later seem like a great way to spend money that they don't have. Nip that in the bud by explaining that a credit card is a serious financial tool that requires responsible use. "Credit, in my mind, is supposed to be used as a convenience," Ulzheimer says. "My 9-year-old understands that the only reason we use credit cards is so Daddy doesn't have to carry around a lot of money on a business trip."
Credit cards are also useful when it comes to staying financially organized, and that can help you teach your kids how to spend responsibly. "It's a great way to show them how to track their spending," Harzog says. "Any kind of [tool that allows] you to set budgets and monitor your spending — that's perfect."
You don't have to give your kids a credit card to let them experience borrowing and repaying. Ulzheimer sometimes allows his 9-year-old son to use his credit card account to make purchases, but requires him to pay for those purchases by a particular date. "I'm trying to almost be his creditor to some extent, and I ask him to make good on any purchase he makes so he understands the concept of getting something in advance and having to pay for it a little bit down the road," he says. Ulzheimer also charges late fees if his son doesn't come through. "So he does understand that there's a downside to not doing it right."
When they're old enough and have demonstrated some responsibility, you can help them apply for a first credit card so they can start building a credit history of their own. Another option is adding an older child or teen as an authorized user to your own credit card account. "You can set up an alert whenever a purchase is made," Harzog says. "There are all kinds of ways to monitor your child if he's an authorized user."
The goal, of course, is to release a child into the world who is savvy about credit and its role in his or her financial life. Credit is an important tool to understand and a piece of the larger picture.
Kate Ashford is a freelance journalist who writes about personal finance, work and consumer trends. She has written for BBC, Forbes, LearnVest, Money, and Parents, among others.