Teaching Your Kids to Be Financially Capable

Highlights:

• Talk openly and honestly with your child when it comes to your own finances, so long as the conversation is appropriate for their age.
• Teach your child how to establish and maintain a budget and ensure they know how to adapt to mistakes like overspending.
• Help your young adult establish and develop healthy credit habits to set them up for long-term success.

Teaching your kids about finances helps prepare them for what lies ahead — and it's best to begin sooner rather than later.

Set the tone for these lessons by keeping an open, age-appropriate line of communication with your child when it comes to your own finances. Explaining how you manage your money, leading by example and being open to questions will help them get off on the right foot.

When they're old enough, you'll want to start by going over the basics, like how to build and stick to a budget. Show your child how to take stock of their income and list out their potential expenses, from streaming services to take-out meals. To help them remain accountable to the budget, you may decide to schedule a time to go over your child's spending habits each month until they get the hang of things.

Beyond a budget, one of the most important topics to cover with your child is credit history and credit scores, as they can impact everything from getting approved for an apartment lease to securing a car loan.

Establishing a Credit History

When young adults come of age, they are often faced with the unpleasant reality that they need good credit scores when they have no credit history. Fortunately, there are a few ways to help your child establish a credit history before they leave the nest.

A great way to start is to have them apply for a credit card. There are several types of accounts available for consumers with limited credit files. Secured credit cards, for example, are often easier to get approved for because they're secured by an up-front cash deposit. Even if your child doesn't plan on using the card often, just having the account will start their credit history — generally, a longer credit history is better for your credit scores.

Another option is retail store-branded cards since they often have lower limits and can be restricted to purchases at the retail store. As a parent, you could also agree to be a co-borrower/co-signer on a more traditional bank credit card.

Finally, you may consider making your child an authorized user on one of your credit cards. This means that they can receive a credit card in their name that is linked to your account. Your child won't be responsible for paying the balance on the account, but your good credit habits will generally be reflected in their credit history. Before adding an authorized user, you (or the primary account holder) should contact the credit card company to determine if they report information to any or all of the three nationwide credit bureaus.

If you choose to go this route, it's important that your child knows how to use the card responsibly, so you are not left with a bill you're unable to pay. You could also ask them to pay the amount that they spend on the card each month directly to you.

Building Good Credit Habits

If your child gets a credit card to help establish their credit history, you'll want to teach them how to use it effectively and build the foundation for good financial habits moving forward.

Show them the breakdown of all the factors that go into calculating their credit scores, so they know how to continue building a credit history beyond their first credit card account.

On the subject of payment history, explain the importance of paying on time every month and in full when possible, which can benefit their credit scores and help them avoid debt. However, note that if they cannot pay in full, they should at least make the minimum payment each month for the account to remain in good standing.

It's also important for your child to have a strong understanding of their credit usage, as lenders look at how much of their available credit they are using. To show that they know how to responsibly use their credit, advise your child to pay off their balance regularly and avoid reaching their credit limit (or “maxing out” the account).

Lastly, teach your child to keep a close eye on their credit reports to make sure nothing incorrect is being reported that could negatively affect their credit scores. You can get six free copies of your Equifax credit report each year when you sign up for a myEquifax account. You can also obtain free weekly credit reports from each of the three nationwide consumer reporting agencies (Equifax, Experian and TransUnion) through April 2022 at www.annualcreditreport.com.