Teaching Your Teens About Credit

Image by Toban Black via Flickr

Right now, there is a great deal of emphasis on teaching teenagers how to save their money and how to spend what they have wisely. This is perhaps an outgrowth of the recession. So many people are concerned about improving their finances and making good money decisions — and they want their kids to learn how to properly manage their money as well. Credit is part of that equation. Here are two strategies you can use to help teach your teenager about the wise use of credit:

1. Checking account with debit card

While this is not exactly credit, a checking account with a debit card can be valuable in teaching your teen how to control spending impulses when it seems easy to buy things with a swipe of plastic. Have the account in both your names, so that you can get copies of the statements. Go over the statements monthly with your teen, and talk about how they feel about their money usage.

2. Charge interest on loans

Many teenagers borrow money from their parents for a variety of reasons. Charging interest on this money can be helpful. Explain how interest works, and that it is money that you pay to someone else to borrow money. You do not actually get something tangible in return when you pay interest. When your child asks for a loan, draw up a parent contract (there are several Web sites that provide loan agreements that parents can use with their children), and charge interest. This will give your teens very real insight into how much interest can cost them. Also, educate your child about teen credit cards and the interest charged. This will help them get ready for the college years and they will understand how the system works before they go out and get a college student credit card.

Do you have any ideas for teaching your teens about credit?