Your kids are growing up fast. Soon, it will be time to have ... the talk.
No, not that one. We're referring to the talk about responsible use of credit. If you don't drive home the importance of good credit practices while your children are young, they're more likely to learn about credit the hard way by racking up more debt than they can pay off.
A new survey by Chase suggests that many parents are not giving their children sufficient understanding of credit and how to use it wisely. The Chase Slate Credit Outlook found that while 56% of parents have talked to their children about money, only 32% of parents explained credit scores to them.
A greater percentage of parents (38%) encouraged their kids to get their first credit cards thus, at least 6% of parents directed their children toward credit cards without giving them a full understanding of how they work.
When should you start a credit discussion with your children? According to Rod Griffin, Director of Public Education at Experian, you should talk to children about money concepts at an early age. Help your kids build credit as early as when they're juniors or seniors in high school. Griffin advises parents to sit down with their kids and show them the importance of making those payments each month and how to manage credit well, so that when they go out on their own, they no longer have to learn from their mistakes.
Those mistakes can be costly. As of March 2018, the average annual percentage rate (APR) on a credit card was 16.47% and rates should rise given that the Federal Reserve has just raised baseline interest rates again.
Young adults who don't fully understand credit may think of it as just a way to delay payment. The cost of credit isn't obvious to them. We suggest using an online calculator to illustrate the effects.
Let's assume you've charged $1,000 and intend to pay that off in a year. Using the current average interest rate of 16.47%, you'll pay $91 in interest. Now let's assume you have a poor credit score and can only qualify for a 23% interest rate. Your total interest will be $128. That’s more than a 40% increase!
If you miss a payment, your credit score will drop, and you are likely to pay a hefty penalty APR - sometimes over 30%. At 30%, that $1,000 charge costs an extra $169 in interest. You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips.
As a closing point, make sure your children know that this example includes no other credit purchases during that year.The point is clear interest charges pile up quickly when you carry balances and continue to spend.
Show your kids how to read and understand a credit card statement. Explain the different sections and their purpose. If you aren't comfortable using your own statement, find an online example.
Don't forget that children also learn by observation. If you talk about using credit wisely but don't do it yourself, you're still sending a message to your kids. It's just the wrong one.
Take the time today to educate your children about credit. Teach them how to use credit responsibly to build and maintain an excellent credit profile that results in a high credit score. As Rod Griffin suggests, "There are a lot of things in life we want to learn from our mistakes... credit is not one of those things."
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