Whether teachers or parents, it is our duty to help children become responsible, functioning adults. Part of being such an adult is having a firm grasp on the importance of credit and a good credit score. While it may not be logical to jump into APR and compound interest with a three-year-old, there are ways to train children early about credit. Teaching in age appropriate stages will help children have a full understanding of credit and how their credit score will affect them.
Preschool is the perfect age to teach the fundamental concepts of credit. A credit score is simply a number telling lenders how likely it is that a person will repay borrowed money, or how trustworthy you are. Trust and honesty are simple concepts to grasp at this age that can help prepare children to learn about credit in the future.
Perhaps the simplest way to begin teaching preschoolers about trust is reading books about trust and honesty to them. Find books that are geared towards young children and include simple story lines that allow room for you to ask questions. It is within these questions that you can begin training. Simple questions such as, “Was Sally right for stealing John’s toy?” and “Should Billy have told his mom the truth?” will begin to show children how important trust is.
From there, you can begin to enforce rules about being honest and reward them for being trustworthy. Using the words “lie, truth, honest, and trustworthy” will help them attach these words to their actions. Once preschoolers understand the importance of trust, they can move on to seeing the rewards that come with being trustworthy.
Here are a few resources to help with teaching trust:
Early elementary is when children begin to learn about math and money. They will learn what money is, how to add and subtract it, and whether or not they “have enough” money in a hypothetical situation. This would be an opportune time to teach them the concept of borrowing. Explain to them that sometimes when there is not enough money for a purchase, people choose to borrow. This is an important building block because it bridges the concept of trustworthiness and money for the child.
Some teachers set up small “stores” in their classrooms where students can purchase treats using points or tickets. This is a great time to allow students to borrow extra points or tickets they need to purchase items and pay back them back later. The next time the student earns points, the teacher can remind them to pay back what they borrowed before. In the home, some parents choose to “lend” money to their children instead of just buying them what they want. This introduces the concept of spending and borrowing at home using real money. Parents and teachers can emphasize that borrowing is only made possible when the child shows that they are responsible and trustworthy.
Here are a few resources to set up a system of borrowing and spending with children:
At this stage, students are learning more advanced math and are more in tune with “the real world” although not fully functioning within it. This is a great time to teach what credit is and how it works for adults. Familiarize them with the idea that banks lend money to adults that prove they are trustworthy. Teach them that the credit score is the tool that banks use to gauge trustworthiness. This would be a good time to open a savings account for your child. This allows them to see a general concept of saving and growing their own money. They can also become more familiar with banks.
Parents can take this time to explain to their children the difference between using credit cards and debit cards when shopping. Explain to them that credit is not “free money” but that it is borrowed money that must be paid back at a predetermined time.
Here are some learning concepts about borrowing repayment:
As children get older and become teenagers, they will begin to become more aware of how money works for them.They will more than likely fully understand the concept of trust, borrowing, and paying back what they owe. They may even begin to ask to borrow from adults. At the same time, they will begin being introduced to concepts like added tax, percentages, and interest at school. Take this opportunity to show them how interest is added to borrowed money and how being more trustworthy -having a better credit score- lowers the interest added. This is a good time to also share personal lessons and struggles with credit with them.
A simple way to teach this concept at home is to charge them interest if they choose to borrow money at home. Use some sort of reward system to choose the interest amount. For example, good grades, keeping up with household responsibilities, and good repayment history are rewarded with lower interest rates. Rebellion, disobedience, and a bad repayment history increase interest rates. In this case, obedience and responsibility at home serves as the “credit score” for the child, showing them how past behaviors are used to calculate interest.
Here some concepts about interest at home:
In high school, teens are beginning to learn about financing college, cars, and may even begin receiving offers for credit cards. This is the time to educate these young adults on the risks and rewards of dabbling with credit. Explain to them how loans will impact their credit score in the long run, especially if they get behind on their payments. Teach high schoolers the value of shopping around for lower interest rates, the importance reading all of the terms and conditions of loans, and considering more affordable options instead taking more credit.
At this stage, they must understand that they are no longer dealing with their parents, but dealing with real banks and financial institutions and real consequences. Some parents allow their teens to be authorized users on a low limit credit card (typically having them pay the bill) to begin building credit. Some allow their teens to purchase their own cell phone plan to begin building a positive payment history. Have teens begin ordering their credit scores or using free online credit trackers, even if they have not started building credit yet. This allows them to see how to check their credit and see in real time how their actions impact their credit scores.
Here are a few more resources to help teens manage credit:
- The importance of building good credit habits.
- All about young authorized users.
- Finding your credit score.
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