4 Lessons to Teach Your Children About Credit

10/04/2012 04:46 pm ET

We entrust a lot of our children's learning and development to the educational system. But schools don't teach everything that our kids need to know. One of the key parts of life that children need to learn (but often don't learn it at school) is about credit, credit reports, and credit scores.

Unfortunately, most children don't learn it at school and they discover it the hard way when they grow up, go to college, get a credit card, max out the credit card, and then spend years trying to fix those credit mistakes. (We did that or know someone who did that).

You can do your kids a huge favor right now by teaching them about credit. Here's how you can help them:

1. Teach your children about what credit reporting and credit scoring are. Tell them how their grandparents and great-grandparents didn't need credit reports to get loans but now lenders rely on credit scores to help them determine whether or not to lend and at what interest rate.

2. Teach your child what credit is and why good credit is important to have.
Tell them that our credit score determines how much we pay for something. Give them a comparison between someone with good credit and someone with poor credit to show that someone with poor credit typically has a harder time getting loans and, when they do, they can pay thousands of dollars more because of higher interest.

3. Teach your children about what makes up a credit score. Tell your kids that there are five areas that determine whether or not they are considered "a good credit risk" or "a bad credit risk" to lenders. Those five areas are: Payment history, balances owed, length of credit history, new credit, and types of credit. Show them what each one means and how responsible financial management can easily help keep all 5 of those credit-score-factors under control.

4. Teach your child about how to manage credit. Help your children to understand why it's important to have good credit and what they need to do to get good credit and keep it. Teach them all the foundational financial management skills you wish someone taught you.

The other way that you can give your children a head start in life is to help them start managing their credit early in life. Don't wait until they are out of the house and on their own for them to get a credit card. If your child is old enough, consider adding them on one of your accounts as an authorized user, this will help them learn about budgeting and credit scores and responsibility. If your children are very young (too young for a real credit card), you can still help them understand credit by talking to them and involving them when you use credit cards and then when you pay them.

Our schools play an important part in educating our children but they don't teach them everything. As parents, you will want to give your kids a head start in life by teaching them about credit before they leave the nest.

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