Teach your Kids these 4 Things about Debt

If there’s one thing you should teach your kids, it’s how to manage their money. Unfortunately, this isn’t something they’ll learn much about in school, so it’s on you as parents to make sure they understand how to manage their money and more importantly, stay out of debt.

Tailor what and how you teach your child to their age, but here are 4 things every child should know about debt.

1.    Borrowing Money for a Purchase Makes it More Expensive

In the world of instant gratification, we live in, it’s important to teach kids that borrowing money (using a credit card), isn’t the way to buy things. When you charge something and carry a balance rather than paying it off right away, you’ll pay interest.

The cost of the item instantly increases as interest accrues daily. The longer they keep a balance, the more the item costs.

2.    Using an Entire Line of Credit is a Bad Idea

Teach kids about credit lines and how they work. For example, if a credit card company gives them a $1,000 credit line, that doesn’t mean they can spend $1,000. To show responsible use of the credit line, only 30% of the credit line should be outstanding at once. This means no more than $300 for every $1,000.

3.    Some Debt can be Good

Debt isn’t always bad. If there will be a return on your investment, debt can be good. Take for example, student loans. Yes, they charge interest, and they can be hard to pay off, but if it means you’ll get a higher paying job or go further in your career, it can be worth it. This only works, though, if you have a major and career in mind versus just going to college just to go.

4.    There are Consequences to not Paying your Debt

Make sure kids understand what can happen if they don’t pay their debt. Talk about secured (mortgage or car) and unsecured debt (credit cards). Talk about the worst-case scenarios and how bad it can be for their credit if they don’t follow through on their financial responsibilities.

Let Kids see you Use your Credit

Don’t make credit use a secret. As soon as your kids are old enough to understand, let them see how you use your credit. Sometimes kids learn better by watching rather than listening. If you always use your credit card for purchases, let them see how much you spend compared to your credit line and how much you pay off each month so they can see the right way to use credit.

Teaching your kids about debt and credit now is the best way to get them ready for adulthood. The more natural it is for kids to use and think about money, the easier it will be for them to stick to a budget and keep themselves out of debt. While debt isn’t always bad, it’s a good idea to keep it to a minimum whenever possible