Growing up, I was taught very little about credit. I didn’t understand anything really. I knew my mom had credit cards and that she paid them off in full each month, but I didn’t really understand why she did this or anything else like how you even get a credit card. How student loans really worked. What responsibilities came with borrowing money.
I, like most, received my first credit card while in university. I was waiting for a class to start when the credit card company approached me and asked if I was interested in signing up for a pre-approved card and get a free water bottle for just a few minutes of my time. Free water bottle sold me. That, and the pretty card with my campus printed on it. In less than five minutes I immediately felt like a real adult. I couldn’t wait to break in my new card!
I had access to both student loans and lines of credit for school but had no concept of what power I actually had access to. I spent every cent that was allotted to me whether I needed it or not. I mean I was going to graduate and pay it off, eventually I knew that… I had zero understanding of interest rate or the amount of damage I was doing to my future by borrowing more than I needed. Though I can say I’ve come a long way, including finally having a payoff plan to be debt free in less than 50 months, it took a lot of hard lessons. Lessons I hope to pass onto my child.
Learn to Budget
Though we’ve already set up an education savings and investment account for our little one, if what we’re able to contribute isn’t enough for her education she will need to come up with the difference. Ideally she will be able to balance work, school and extra curricular activities but if she can’t, having a job will be the last priority while in school, she may need to borrow money.
I think student loans can be a great tool if used property (note: I have zero understanding of how US student loans work, I’m only talking about Canadian). If the time comes and she needs to borrow money to top off her education, budgeting will be of utmost priority. Budgeting is a tool all young adults require, but are often not taught. I plan on starting her on a budget very young so that if she does end up relying on borrowed money for post secondary she is aware and in touch with her financial situation. Just because money may be given to her doesn’t mean she needs to use it.
Credit is confusing. There are so many types, each with their own set of rules. I plan on sitting her down well before she’s old enough to obtain credit and explain what it is. Explain interest rates, how they’re calculated and the importance of borrowing as little as needed and to treat it with respect.
After she understands credit it is important that she learn to use it, properly. Make sure she opens a well researched credit account, not one that gives away free water bottles. Teach her the importance of paying off the balance so she never pays interest and doesn’t abuse the power given to her in the form of a plastic card. She needs to understand when it makes sense to use use credit and when not to.
Credit is confusing which is usually why people end up in trouble. With some clarification and early education I’m sure I can help our daughter prevent some of the mistakes I made!
How do you discuss credit options to your kids?