Advice for parents who want to help boost their children’s financial IQs
As a freshly minted college graduate, I thought I was well prepared to launch into adulthood. But there was one nagging issue that kept holding me back: a lack of credit. Without a credit history, landlords weren’t too keen on having me as a tenant. My attempt to set up a cell phone account was successful only after my sister co-signed my agreement.
My story isn’t unique: Young adults often don’t have a clear understanding of the steps they need to take to put themselves on a good financial path. That’s why financial literacy—from learning how to save and spend wisely to understanding smart strategies for building up a credit history—is critical as children transition into young adults. What can parents do to help ensure their kids have the right financial education?
Learning about money
The first step for many parents is to simply make conversations about financial issues a regular part of the day-to-day routine. That doesn’t necessarily mean having detailed discussions about the family’s finances, however. Parents can use timely news stories as conversation starters to dig into topics such as the importance of saving or the danger of too much debt.
There also are plenty of good resources kids can use to learn at their own pace. Here are a few books and blogs that offer good introductions to the fundamentals of personal finance:
- Why Didn’t They Teach Me This in School? 99 Personal Money Management Principles to Live By, by Cary Siegel
- The Money Savvy Student, by Adam Carroll
Bridge the credit gap
Hands-on financial experience can help bring these lessons to life for children, and parents can play a big role in helping them safely navigate these experiences. For instance, parents can help kids learn smart credit card strategies. After all, developing good financial habits at an early age will likely pay dividends well into adulthood. Here are some strategies parents can use to help their college-age children build credit:
- Make them an authorized user. Parents can add their child to their credit card account as an authorized user. The parent will be able to see any of the purchases made by their child, and may want to set up ground rules for when the card should be used—for example, yes for textbooks but no for midnight food orders.
- Use a secured card. A secured credit card is like a debit card in that the spending limit is however much cash is held in the account. Unlike a debit card, a secured credit card can help build or repair a damaged credit history by showing that the user can be trusted to keep spending in check.
- Apply for a student card. Many credit card companies offer special cards aimed at students. These typically carry relatively low credit limits and charge high interest rates—often 25% or 30%. Those high rates won’t matter if the student pays off the balance every month. But if the student lets the balance grow, they’ll receive a powerful lesson in the challenge of repaying high-interest debt.
Kids don’t need to be passionate about financial literacy, but the more they learn about good financial habits as children, the more likely they are to carry them into adulthood. What’s more, those good habits will serve as a solid foundation as they identify and pursue their own long-term financial goals.