As an adult, you probably know the importance of having good credit. Getting a good interest rate on credit cards and loans is just one of the smaller benefits of good having good credit. Having a good credit score plays a big role in buying a house or a car, and even in getting a job. Parents can play a very beneficial role in helping their kids establish good credit habits. That way, when they're older, they'll already have the skills necessary to get an excellent credit score.
Help your child understand when you're using your credit card and when you're using a debit card. To someone who doesn't know, all plastic looks the same. A child watching a parent shop can easily think that parent uses credit for all their purchases when that parent is really using a debit card. Explain the difference between your two cards - that one card pulls cash from your checking account and the other creates a loan that you have to pay back.
Create a formal arrangement when your child borrows money from you. Instead of just handing your child the cash for spending, sit down and write up an agreement. In the agreement, include the date you're supposed to be repaid. Discuss what you think should happen if your child doesn't pay you back by on time and include that consequence in the agreement. It can be something simple: the child has to wash the car each week they're late on payments. Use this opportunity to talk about what banks do when you're late.
When your child has a job and is old enough, help them open an account with a debit card. That way they can get hands-on experience with using plastic. Have the bank turn-off the feature that lets your kid overdraft their account. Instead, transactions that exceed the current balance will be declined. Teach your child how to check the account balance by phone, over the internet, and with a smartphone app if it's available.
Teach your child the types of habits that banks value, especially paying their bills on time and spending a reasonable amount of month every month. These two factors have the biggest impact on a person's credit score. So, they're the most important things to learn. Overspending money elsewhere can make it hard to repay what you've borrowed and in turn make you late on payments.
Show your child the way to save up for big ticket items - by helping them put aside money every month. When you get in the habit of saving up for things, you eliminate the need for instant gratification, which is often why people use their credit card instead of saving up for purchases. You can encourage your child to save by matching their savings or offering to pay a certain percentage of the cost for what they want to buy.
One of the best, and easiest ways to teach your child good credit habits is to let them see you practicing good habits. If they see you use your credit card, they should also see you pay the bill every month. That way, they lose the notion that credit cards are magic money.
Steve Dowell is a seasoned writer in personal finance, specializing in credit repair. You can find more of his articles located at CreditRepair.org.