5 Steps to Introduce the Concept of Credit to Your Teens

I stated on many forums that I got a sound education on finance from my dad. Quietly strangely I learned investing first before learning how to manage personal finances. This seems quiet reasonable to me and I can’t thank my father enough for taking this route. I learned all the benefits of investing, how money grows, why banks pay interest to depositors.

It was a natural question for me to ask, “how the money for investing come then?”. My dad explained that my monthly salary or business income would be the only money I will have. He taught me how I can save money from my paycheck to fuel the investment. The more I save the more investment I can make. During my childhood (almost 25 years back) the concept of credit card was not there in India, where I grew up.

When I joined the workforce in the year 2000, Indian economy was growing at a rapid pace, multinational corporations were setting shops there and within my first month of employment, I was offered a credit card. Fortunately my credit limit was too low to incur any debt, but, soon I realized that credit cards are too dangerous for people who don’t know how to use them and at the same time, too good for people who can use it for their advantage.

I came to this country in 2005 and the first financial aspect I learnt thereafter is the concept of credit score. This one thing my father couldn’t teach me as he was himself unaware. I am a hindu (world’s oldest religion) and one of the teachings I received from my religion is that borrowing money is a bad karma. Hinduism does not honor living on borrowed money.

Hence, I refused to live on credit. I only allow myself a lifestyle my salary, after 50% saving, allows me to. I was not a naive to not recognize the importance of good credit history though. I realize I have to take credit to build my credit worthiness. The only criteria that determines whether you can handle your credit is your past performance of handling credit. I learned wise use of credit cards. I decided to spend from my credit card and pay in full before the payment is due.

I realized I needed credit for everything good in my life, a car and a home, for that I needed to have a very good credit history. Even to lower my insurance premiums and to enhance my employability I needed to have a better credit history and score. With $6000 average credit card debt in this country I am not sure if many people understand the importance of credit. Although I see people talk about debt snowball and debt snowflake, people generally don’t talk about the prevention part. They’ll come to your rescue when you are deep in debt.

Can’t you parents teach this important factor in personal finance to your teens or even pre-teens? I am sure they will understand all of it if you make your best effort. Lessons learned at an early age go deep in to human mind and act as the core values even in subconscious self.

Here are some tips for parents, to teach your children the value of credit history, and helping them to establish good credit history from the age they have access to credit.

1.     Start by teaching that anything bought on a credit card is not free, at the end of the month it needs to be paid, and, if not paid in full they incur interest as someone else paid the money to the merchant on your behalf. Show them the monthly card statement and the pay off calculator table that every statement carry these days. Tell them how you are paying much more than th purchase price if you go on paying on ly the minimum payment due. They should understand how foolish it is to pay for a TV set over years which can cost double the sticker price of the TV. Try to change their TV habit if they are too much into it.

2.     Tell them the difference between a good credit and a bad credit. There are few things in life for which borrowing money is the only option. Show them the monthly interest rate (APR) listed on your card statement. They should understand how credit card debt is many fold more dangerous than a mortgage debt. Teach them why paying off monthly bill is different than paying off entire mortgage at one go. They should know how good credit helps reducing mortgage interest rate.

3.     Your teen should know the benefits of using a credit card. I assume you use a rewards credit card (to me using a credit card which don’t have you rewards/points/cash backs is foolish). You can explain your teen how you accumulated the points, the % rate, also explain how you can maximize the rewards by using gas card at gas stations and air mile cards to purchase the flight tickets.

A Credit card gives you the freedom to carry less cash with you, they offer purchase protection and fraud detection. Credit cards also give you access funds in case of emergencies. Your teen should know these positive aspects.

Tell them it’s absolutely safe to use your credit card in vending machine as long as you closely monitor your online account for recent charges and scrutinize the monthly statement for every charges and fees.

4.     Share the stories of your personal credit mistakes with your teen(s). I don’t enjoy admitting when I am wrong, but telling my child(ren) about my credit mistakes or bad purchasing choices could potentially save him/her/them from making the same mistake. If you or any one you know ever went to collection or even bankruptcy, share the story with them. Tell them how bad was the experience and how stressful the life was.

5.     Give them access to credit card as no lesson is complete without practice. When your teen gears up for the college, have him/her apply for a secured credit card, which requires depositing an upfront amount equal to the credit limit. When I first arrived in this country I had a $500 secured credit card. Few card issuers like AMEX offer feature of additional card. You can set a lower limit on this additional card till your teen shows the financial maturity needed to handle a credit card. I advice you to monitor their usage pattern on his or her first credit card.

This way they will be able to build their credit history, they can get to keep the rewards or points and they have access to funds when they unexpectedly need money.

Readers, are you teaching your teen about importance of credit and how to build a good credit history?