While there are many ways to learn life’s important lessons, one of the best ways to learn is by doing – or through old fashioned trial and error. You can tell your kids how to fish, but they’ll become better fisherman by baiting their own lines and strategizing ways to get fish to bite.
The same can be true when it comes to learning about finance. You can tell your kids all you want about budgeting and credit cards, but they’ll learn life’s most important (and painful) lessons by taking the reins and making their own mistakes. We can only hope that, over time, the mistakes they make aren’t insurmountable.
Money Lessons You Can Learn Firsthand with a Credit Card
Because of the way we learn, many money experts suggest you expose your teenagers to credit cards fairly early on. That doesn’t mean you hand them a huge line of credit and let them go wild; instead, you can add them as an authorized user to your credit card or help them get a card with a small limit to test things out.
It’s much better to expose them to the realities of credit slowly, under your supervision, then to release them into adulthood without having any idea how credit works or the real consequences of making poor decisions.
If you want to let your kids “ease into” their relationship with credit cards, helping them get one might be your best option. Here are some lessons they could learn first-hand:
#1: What does debt really mean?
The concept of “debt” can be hard to explain to a child or even a teenager. They barely know what it means to earn money, let alone owe someone.
Credit cards offer one of the easiest ways for anyone to gain an understanding of debt, especially at first. It might be fun to charge a couple of purchases at least at first, but the reality of debt rears will rear its ugly head when they get that first bill.
Imagine your kid goes buck wild and charges $300 on their new secured credit card. They might struggle to pay it off for months with their part-time job, and hate themselves the entire time. The thing is, these painful few months could be one of the best things to ever happen to them.
While struggling with debt is a tough lesson to learn, it’s one they may remember when it comes time to finance a car or take out a large sum of student loans. The misery of debt is something people tend to remember, so they might as well learn early on.
#2: How does interest really work?
While understanding what debt and owing someone money means, kids have only an abstract understanding of interest payments until they start making them themselves. They probably know you owe money on your home, but they don’t get the fact that you’re paying thousands of dollars in interest payments every year.
Credit cards make it easy to understand interest on a much smaller (and less severe) scale. If they go to dinner and a movie with friends and charge $50, pay $20 on the balance the next month, and see the now have a balance of more than $30 due to accrued interest, they’ll learn what interest really means – and that carrying debt means paying more for everything you buy.
#3: Why is budgeting important?
Charging purchases to a credit card is the easy part. Dealing with the bill is an entirely different story.
Still, there’s a lesson to be learned there – especially for teenagers and young adults. Charging purchases to a credit card with the full knowledge that the bill will come gets them in the habit of anticipating their expenses and yes, budgeting. If you know a $50 or $100 credit card bill is arriving later in the month, you know to set aside at least enough to cover the minimum payment – or, ideally the total bill.
Most of us will have bills to pay our entire lives, from mortgage payments to student loans and utility bills. A credit card provides a quick introduction to that world, and the idea that we need to budget the money we have to cover our expenses.
#4: How do I build credit?
One of the greatest benefits of introducing a young adult to credit is that it helps them start building their own credit history early. By helping a young people get a secured credit card or added them as an authorized user to your own credit card account, you can help them learn about credit and get important reporting from the three credit reporting agencies – Experian, Equifax, and TransUnion – on their reports.
While building credit may not seem like a big deal now, your teenager or young adult will appreciate it when they get ready to buy a home or finance a car and realize they already have a solid score. And, once they understand how important it is, they’ll be more inclined to give their credit the respect it deserves.
#5: What can I afford?
Last but not least, credit cards offer kids a glimpse into the idea of what they can actually afford. Too many people graduate college and get their first jobs without having a clue what their salary deems possible in terms of lifestyle, and this is mostly due to the fact that credit is so cheap and easy.
A credit card introduced early on can help kids figure out what they can and can’t afford. If they’re earning a low wage with a part-time job or babysitting, charging purchases and getting their first bill will show them firsthand how far their money can go. If they’re earning $10 per hour and charge a $50 bill at the mall, for example, they’ll quickly realize they worked 5 hours (or longer after paying taxes) to cover whatever they bought.
This lesson and others will carry through to adulthood, hopefully making our young people wiser and more thoughtful with money along the way. Credit may be the source of financial woes for millions, but it’s a necessary evil. If you can’t help your kids escape that fact, you might as well show them how to win the game.
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