You Ask, Equifax Answers: How Can I Teach My Children Good Credit Habits?

Highlights:

• It's never too early to teach your child how to save, budget and use credit responsibly.
• Young children can learn about using credit by observing their parents.
• A debit card or making your teen an authorized user on your credit card are good ways for teenagers to start building their credit history.

Question: What should parents do to educate their kids about money, especially the importance of credit histories and credit scores?

Answer:
Smart financial habits can take root at any age: It's never too early to teach your child how to save, budget and use credit responsibly. In fact, the sooner you start sharing healthy financial tactics with your kids, the better off they'll be when they're grown.

If you have younger children:

Many families start financial education early by giving their children a small allowance and encouraging them to practice simple saving and spending. Help your child set a goal to save for an item they'd like to buy, such as a new toy or book. Work with them to create a realistic savings timeline and encourage them throughout the process. While you want your child to learn patience, you don't want it to take so long that they give up and miss out on the satisfaction of achieving their savings goal.

Young children also learn a lot simply by observing their parents day to day, and money issues are no exception. For example, if one brand of milk is cheaper than another, explain to your child, "I'm choosing this one because it's less expensive than the other brand, and they're basically the same thing." When you shop together, talk them through what you're choosing to buy and why so they start understanding the reasoning behind financial decisions. And don't forget to teach them how sales and other retail discounts work.

It's also important to answer questions that come up. For instance, if you can't afford something and your child asks why you don't just pay for it with your credit card, use that as a teaching opportunity. Explain how credit cards are different from cash—how you're essentially borrowing money that you eventually have to pay back. It may seem complicated, but children who are observant enough to ask questions about the world around them are generally ready to learn more.

If you have teenagers:

When your child is older, start diving into the more complex aspects of money management. Giving your teen a debit card while you're still a joint holder on their bank account could be a great first step. They get a little more independence, but you still control how much your child spends.

Start laying the foundation for them to eventually have their own credit card. Do this by walking your teen through your monthly billing statements. Explain what minimum payments are and what happens if you carry a balance month to month. Most consumers take on some form of debt in their lives, such as a mortgage or a car loan, so this will help prepare your child to manage debt in a healthy way.

You can even show them your credit scores. It might help to liken them to a report card at school; by handling credit responsibly—paying on time, avoiding lots of debt—you get "good grades," which will help you obtain future loans and qualify for lower interest rates.

And then, when you think they're ready, consider making your teen an authorized user on your credit card (although the minimum age may vary by lender). This way, you can set credit limits and monitor their spending. Be aware that making your child an authorized user means their spending will impact your credit scores, so be sure they understand the consequences of their actions. A free monthly credit score and Equifax credit report are available to you when you sign up for Equifax Core Credit™. A VantageScore is one of many types of credit scores.

Granting your child access to a credit card is a big step, but if they're ready and responsible, it's an excellent way to start building their credit history and prepare them for adulthood.