How to Teach Your Kids About Credit Cards

It's a good idea to teach your child early about how credit cards work.

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The Internet is full of misinformation about how to teach your kids about credit cards. There’s always been a lot of sketchy stuff online, but we just read an article from a very reputable publication that said secured credit cards are tied to savings accounts, and you should consider getting your kid a prepaid debit card.

We respect your decision as a parent if you want to get your kid a prepaid card, even if we don’t agree with it. But what about that whole thing with secured credit cards always been tied to a savings account? That’s just straight-up wrong. NerdWallet thinks you deserve better information, so we put together our own, thoroughly fact-checked Q&A on kid-friendly credit card education. Your child may not need a credit card now, but he or she should still know what a credit card is and how it works.

[See 50 Ways to Improve Your Finances in 2012.]

Q: Why talk to kids about credit cards?

A: When your child is old enough to have their own credit card, they’re more likely to use it wisely if they already have good spending habits to fall back on. You can tell someone over and over to make smart decisions, but if you don’t show them how, they probably won’t.

Q: Aren’t credit cards kind of a boring topic for kids?

A: Not at all. You’re actually teaching them about money, and your kid is interested in money for the same reasons you are. Money is awesome because you use it buy stuff. Tell your kid you’re going to teach them how to buy stuff and pay for it properly. It really is that simple. Credit cards are only boring when you frame them that way. Don’t start the conversation with, “Now we’re going to talk about important adult things because it’s good for you.” That’ll put anyone to sleep.

Q: What should I talk about first?

A: Make sure your kid understands basic money management before you mention credit cards. Talk about your household budget, and have them practice creating a budget of their own. Give your child a reasonable allowance and help them set a monthly savings goal. If they’re in elementary school, have them work with cash. This way, they can literally see money coming and going, which will turn spending and saving into solid concepts for them. If your child is a teenager, get them their own bank account. Wells Fargo’s Teen Checking account allows your teen to manage their own account, but also lets you set daily limits on debit card purchases and withdrawals. Many credit unions have teen checking accounts, too, and they’ll also have the best educational resources in town.

[See 12 Money Mistakes Almost Everyone Makes.]

Q: I think my kid’s ready to talk credit cards. What should I cover?

Using your own credit card as an example, explain how you pay for things, what you do when your bill comes each month, and how much time you have to pay off your purchases. Beyond the basics, here are six important concepts you should discuss:

1. Credit cards aren’t free money. They let you delay payment by borrowing money from your future self. To avoid trouble, don’t charge anything you can’t afford to pay back now. Live within a budget, pay bills on time, and keep track of your charges.

2. The longer you take to make your payments, the more you have to pay. Making only the minimum payment will land you with a lot of interest. If you bought a candy bar, would you rather pay $1 for it right now, or $3 for it later? Make the minimum payments, and that reasonable purchase gets pretty expensive in the long run.

3. When used correctly, credit cards help build your credit score. That will come in handy in the future. A good credit score tells lenders they can trust you to pay them back if they lend you money for a car or a house, so you’ll get a better interest rate.

4. Don’t use your credit card all the time. There are many other ways to pay for things you need. Cash, checks, and debit cards are better tools for spending within your means. We don’t recommend prepaid cards because they usually come with extra fees, and they’re unnecessary if you already have a checking account, but they’re still worth discussing.

5. Debt isn’t always bad. Credit can help people make investments that they couldn’t otherwise afford, like a car, house, or university education. However, people need to be really careful, because too much debt is definitely bad.

6. Credit cards can do some things that other kinds of money can’t. If your credit card gets stolen, and you tell the credit card company what happened, a thief can’t steal your money. Some credit cards also give you rewards when you make your payments on time.

[See 9 Money Strategies for Creative Thinkers.]

Q: My teen is old enough for a first credit card. What should he get?

A: Although you should always take a look at the fees, rewards, and interest rates when applying for a credit card, there are a few teen-specific aspects to consider.

If you’re worried that your teen will overspend, get them a card with a low credit limit and cosign it for them. This way, if they do get into trouble, it won’t be catastrophic for either of you. If your teen or student is traveling abroad, try to find cards that won’t have international transaction or ATM fees.

We recommend that you get a credit card with no annual fee so that you can keep the account open without using the card, and thus raise your teen’s credit score.

Q: Do I know enough about credit cards to be a good teacher?

A: You don’t have to know everything, but you should feel like you have a solid understanding of credit cards before you talk to your kid. If you need to brush up on your finance chops, this is the greatest excuse you could possibly have. You owe it to yourself and your family to feel comfortable with the basics of personal finance.

[See Teaching Your Child Money Habits for Life.]

Q: Where can I go to learn more?

A: Here are a few of our favorites financial literacy websites:

Resources for Kids

Warren Buffet’s Secret Millionaires Club: A fun, animated Web series from the folks at CreditReport.com. Join Elena, Jones, and Radley as they learn basic business skills and money management strategies from “the world’s most famous investor”

Online Games That Teach Kids About Money: Brought to you by the Washington State Department of Financial Institutions, this is a great list of links to money management games

Resources for You

A Consumer’s Guide to Credit Cards: The Federal Reserve’s guide to all things credit cards

MyMoney.gov: From the Financial Literacy and Education Commission

Tim Chen is the CEO of NerdWallet, a personal finance website dedicated to helping consumers find the best credit cards of 2012.