A Fun, Interactive Way to Teach Your Child about Credit

While your son or daughter may never need to dissect a worm or cite themes from Where the Red Fern Grows in real life, learning about personal finance and credit are two subjects that are sure to serve them well throughout their lives. The recent economic downturn makes it clearer than ever how important it is for the next generation to understand how to save, spend, and invest their money smartly.  

There are many resources out there on the web that offer ways to explain the basics of personal finance to young people. Not as much information exists when it comes to teaching kids about credit, however.

Given that the current financial crisis has its origins in credit markets, hands-on credit education is crucial. But how do you show your children how credit cards work while protecting them from the real risks that come with access to credit?

Cards from "The Bank of Mom and Dad"

Gail Vaz-Oxlade, host of the TV show "Till Debt Do Us Part," shares a great real-life tool parents can use to introduce their kids to the workings of credit cards. 

She suggests issuing your child a credit card from "The Bank of Mom and Dad." Draw up a cardholder’s agreement for both of you to sign. Set an appropriately low credit limit for the card (for example, $10 for a ten year old), and establish a monthly deadline for paying the bill before interest charges apply.

Your child can then take her "credit card" when she goes shopping with you. If she sees something she wants to buy, she can give you her card so you can make the purchase. Make sure to give her a receipt, and remind her she’ll need to pay the bill when it arrives, using her own money. You will also need to follow up with a bill, noting the payment due date.

"If she spends more than she can afford, or makes her payments late," Gail says, "you’ll have to charge her interest on the balance." She suggests parents use a 25% interest rate for this exercise. "When she sees that the $10 item actually costs $20 over the long run, she’ll know that credit cards should be used with caution."

What’s your solution?

Parents of older teens can get their child his or her own card, which may be in the parents’ name. And parents of children of any age can set up a card on the "Bank of Mom and Dad."

Whatever solution you implement, keep in mind that the end game is to empower your kids to learn about and effectively manage credit.

How are you helping your kids to obtain a credit education?