A Quick Guide to Securing Your Child’s Credit Future

Written by experts Pat Collins and John Halloran.

A recent study reveals that 42% of Americans have accrued more credit card debt since the COVID-19 pandemic began. It appears that COVID-19 has created unparalleled financial challenges for both individuals and families, and this is especially true when it comes to their credit card balances. And while this is an unfortunate situation, this is not a new phenomenon; credit card debt has been an ongoing problem for a long time.

The purpose of this guide is to empower parents by offering a step-by-step process to help their children develop a positive relationship with credit. We’ll give parents the tools they need to guide their children – to give them a clear understanding of financial literacy by the time they graduate.

Education and Habit Formation Are Key To Financial Literacy

It’s important that parents understand their children are closely watching and modeling their own financial behaviour. Studies reveal that children as young as three and five years old already display an understanding of how their actions influence future outcomes, while children at age 7-years are already developing habits. This shows that the most effective way of helping children learn positive habits is to ensure parents themselves are modeling key financial behaviors.

Financial Education

It’s really important that, as children get older, they learn about complex financial concepts like credit scores and compound interest.

Preschool and Early Elementary

Part 1: Learning About Money

Children this young learn best through hands-on tasks, so money activities should include lots of real life experiences.

Different Types of Money

These lessons should include helping young children understand there are various kinds of money, like coins, paper money, and credit and debit cards. They should also be learning about the value of different types of currency.

What Money is Used For

It’s not only important that parents teach children that money is used to buy items we need or want, it’s also important to teach that money is used to help other people.

How We Get More Money

Because of our use of credit and debit cards, younger children are inclined to believe that money comes out of nowhere – that there’s an unlimited supply. It’s up to parents to explain that there is a limited supply and we can’t have everything we want.

Part 1: Good Financial Habits

Saying no, and explaining why, are important concepts for children to learn.

Spending Habits

One of the most important words children need to hear is the word ‘no.’ As a parent, it’s up to you to determine if your children have the idea that money is used to purchase anything and everything they ask for.

Saving Habits

The best habit parents can teach their young children is to save a portion of their income – just this one habit can have a positive effect throughout their lives.

Sharing Habits

Children should observe their parents’ healthy attitude towards money, including the concept that money is not only for them – it’s also used to help others.

Elementary School

Part 1: Saving Habits

During this stage of a child’s life the main habit to emphasize is saving.

Open a Savings Account

Saving money should be a positive experience – opening a kid-friendly savings account at their local bank should be a huge event for your child.

Money-Banks

At this age children start wanting more expensive items, so parents can use a money-bank or savings jar with photos of items they’re saving up for. Watching their savings grow can be a huge motivator for children to save, while achieving a money goal can be a valuable lesson to last their entire lives.

Part 1: Spending Habits

At this stage of their lives, children are learning how to make decisions on spending.

Comparing Prices

Parents should teach their children about quality and quantity when it comes to price comparisons; the theory being that it sometimes makes sense to purchase a more expensive item due to its higher quality or larger quantity.

Part 1: Becoming Financially Responsible

At this stage of their development, children should be learning to become responsible for their own money. They’ll learn valuable lessons, often from making mistakes.

An Allowance

Giving children an allowance is a personal decision for parents; however, if you decide to give an allowance the money should be used as a teaching tool for learning fiscal responsibility and other good money habits.

Earnings from Extra Chores

Many parents pay their children for completing extra chores. Some use this system instead of paying an allowance, others pay in addition to an allowance. Again, this is a personal decision for parents.

Middle School and Junior High

Part 1: Credit Concepts

This is the perfect time for your child to learn about credit-related concepts.

Compounding Interest

To help children save for a long-term goal, like a car, parents can teach their children about compounding interest by paying them a high rate of monthly compounding interest on their savings.

The Pros and Cons of Debt

If parents are open to discussing their personal experience with debt it can be very helpful in teaching their child about the pitfalls of debt; this discussion could also include when it makes good business sense to use credit instead of saving up for a purchase.

Credit and Debit Cards – What’s The Difference?

Perhaps the first step towards understanding credit cards is to learn the difference between credit and debit cards. Put simply, credit cards are an uncomplicated way of borrowing money that must be paid back later; alternatively, debit cards are a means of using your own money from your own bank account.

Part 1: Learning About Budgeting

This is the time for parents to teach their children the art of budgeting; they need to understand that you don’t simply keep spending your money until it runs out.

How To Allocate Funds

There are a number of ways parents can teach their children the concept of allocating funds. The first way is to create an abridged version of their own budget and show it to their children, discussing how the family’s income is spent. The second way is to help your child create their own budget. The idea is to eventually allow the student to take control of their own budget. Hopefully, this will develop a habit that stays with them for life.

Part 1: Financial Fraud

Today we’re seeing very young children being exposed to technology, like the internet, which means there’s a growing risk of identity theft for middle schoolers.

Data Protection

Data protection, or data hygiene, simply refers to protecting your personal information. This is a very important subject to discuss with children of this age. 

Scams

Scams come in all forms, both personally and financially, so parents should consider what access their children have to debit cards and bank accounts. The more access they have the more susceptible they are to potential scammers.

High School

Part 1: Personal Finances

The easiest way to prepare high school students for the real world and the challenges of creating a solid credit score is for them to have a good understanding of personal finances. Parents are in the ideal situation to provide this knowledge.

How to Budget

Once your high school student has a regular job he/she should have a good understanding about budgeting. This is the perfect time to put that knowledge into action.

About Banking

When a student gets their first job they will usually be required to create a checking account; this is because most employers use direct deposit. 

When that student obtains their first debit card, it’s a terrific opportunity for parents to discuss how and when the student should give out their debit card number.

Part 1: Credit Knowledge

As a responsible parent, you should be teaching your high-school student the basics about topics like credit cards and credit scores.

Credit Scores

Any lender who is evaluating a borrower will look at both their credit score and credit report to determine how likely the borrower will be to make loan repayments on time. Potential borrowers with poor credit are a high credit risk, meaning that the lender will either charge them a higher interest rate or simply deny the loan.

Open-Ended Credit

Open-ended credit, or revolving credit, can be used over and over again, provided the limit is never reached. Monthly payments must be made; however, the full balance does not have to be paid off. The most common type of open-ended credit is a credit card.

Closed-Ended Loans

Closed-ended loans, or installment loans, are when a borrower gets a loan for a specific purpose over a specific period of time. With this type of credit, the loan is paid back in installments until the entire loan is repaid in full.

Student Loans

A student loan can be a private or federally funded loan. These loans are used to pay for college expenses.

Auto Loans

Auto loans secured through a credit union or bank typically have a lower interest rate, while dealerships are often willing to give loans to borrowers who have poor credit.

Payday Loans

A payday loan is a secured loan, meaning that the borrower’s forthcoming paycheck is used as security for the loan.

Mortgage

This is a loan offered to a consumer for the purpose of purchasing a home.

Part 1: Proper Usage of Credit

Before children are offered their first credit card it’s imperative they fully understand the proper and safe way of using credit.

Making Payments

High-school students must understand the consequences of missed payments when using credit, including the problems associated with running up a large balance on a credit card and only making minimum payments.

Guidelines for Credit Usage 

It’s up to parents to guide their children on how to use credit in the future, which means there should be intentional discussion and instruction on how to use credit properly. Without this knowledge, students will likely follow other people’s bad habits. 

The following are both good and bad ways credit cards can be used –

• As an emergency fund
• When you simply don’t have the cash
• To build credit
• To take advantage of rewards

The more controlled exposure high school students are given to the world of credit cards, the better. One suggestion is to have a debit card attached to their own checking account; this will help them develop good spending habits.

Setting Up Credit Prior To Graduation

There are a few ways minors can start building credit history whilst still attending high school. When done under a parent’s watchful eye, building a positive credit history can help mitigate errors of judgement in the future and even give them a credit jumpstart.

Part 1: Building Credit

Parents can help their teenager build credit by adding them as an authorized user on their credit card account. If you decide to take this route, the following guidelines can be put in place –

• A primary account should not be used: Instead, open a new account with a minimal spending limit, especially if the primary account has a high spending limit.
• Make sure the account to be used has a clean history: Parents can use an existing account; however it’s important that the account has no history of delinquency because this will negatively reflect on the student’s credit report.
• Create an agreement: A written set of guidelines should be created for how the credit card is to be used and the amount that can be charged.

Part 2: Co-Signing a Student’s Loan

If you plan on helping your student purchase a car, consider co-signing a loan instead of paying cash, with the option that the student can refinance in their own name once they turn 18-years of age. As the parent you will be responsible and your credit could be affected if payments are not made, but this helps responsible students establish a credit history.

Part 3: Obtaining First Credit Card

There’s a lot for students to consider when they get their first credit card. If they’re adequately prepared and even have a small amount of credit history, they’ll have a huge advantage over their peers when navigating the often-complex world of credit.