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Credit and Kids

Here's what children should know about plastic purchases (hint: learning to manage money young has a big impact when they grow up!)

Most of us probably headed into the world without a very good understanding of how credit really works – and how to use it responsibly. If the recent credit crunch is any indication, this country has a real problem. The average U.S. household carries $8,000 in debt on their credit cards, and has almost 13 total pieces of plastic. And a whopping 43 percent spend more than they earn each year.

We invest a lot of time helping our kids learn and grow, from extracurricular activities to tutors in specific subjects. Yet not many parents focus much on money and credit. Here are some basic tips to get you started from Brette Sember, author of The Everything Kids' Money Book.

Start young

Your 5-year-old doesn't need to know a lot about credit (he's still trying to learn how to count money and finding out how to spend it). But you can help your preschooler learn to save money. If he gets $20 for his birthday, suggest he save half and spend half.

Start a piggy bank or even a real savings account for your child. Learning to save is an important skill – and doesn't come naturally to many kids. It is, after all, a kind of impulse control.

Young kids can start to understand the concept of credit. After all, your child has seen you use credit cards, so it's a good idea to explain. Tell your child the credit card allows you to buy things all month long and then pay for them all at once, at the end of the month. Tell him if he bought a piece of gum from you every day of the week for 10 cents but you let him use credit, he'd have to pay you 70 cents (plus interest) at the end of the week. Same concept. Buy now; pay later.

Thinking about money

At elementary and middle school age, your child understands how money works, but he still needs to be taught how to think about it. Explain what a budget it: You as an adult have to create a budget for the household and can't run out and spend every paycheck on clothes, video games or candy, because there wouldn't be money for electricity, gas or food.

Encourage your child to make thoughtful purchases, avoiding impulse buys when possible. Savings should be something that your child is expected to create and maintain. Encourage him to watch his savings grow, and praise him for doing so.

If your child wants to buy something he doesn't have the money for, allow him to borrow it from you – only if you set up and enforce a repayment schedule. This lets kids learn credit in a hands-on way. Help him understand what purchases are beyond his means. If he wants to buy a $100 item but only earns $5 a week in allowance, it will take him 20 weeks – almost five months – to pay that back.

Towards responsibility

By the time your child has become a teen, he'll hopefully have learned plenty of financial lessons from you. Either way, this is when you can have the most impact on how he'll manage money as an adult.

Encourage your teen to set up a budget that includes expenses such as school lunches, entertainment, gifts and savings. Give him an allowance or require him to use money from a job to cover expenses. Help him understand how to use the money carefully to meet all expenses (again, he'll need a budget). Give your teen the register from his savings account and teach him how to balance it against bank statements – and keep it up-to-date.

Once your teen is driving and is more independent, consider having a credit card issued to him from one of your accounts. You'll remain the account holder, but he can be listed as an authorized user. Talk to him about how you use credit.

Explain that credit cards are a convenience that allows people to pay for things with one bill at the end of the month (and yes, you should be paying that balance off each month and teaching your teen to do the same). Tell him what expenses he's authorized to put on the card. For instance, maybe you limit purchases to gas or school supplies.

Expect him to retain the receipts and be prepared to provide an account of exactly how he used it. If you allow him to use the card for personal discretionary spending, like movies or eating out, expect him to pay you back for all items charged to the card by the date the monthly bill is due.

There's no oversight

Teens also need to understand what credit reports and credit scores are. A credit report is like a report card for how well you pay back your loans and credit cards. It shows late payments or missed payments. A credit score is like an overall grade for how well you manage your credit.

This is real life, though, and not school: Every mistake you make will haunt you for at least seven years (the length of time an item remains on a credit report). If you have bad credit, you won't be able to get a car loan or a mortgage when you want it.

Teach your teen to get his free credit report every year from all three major credit reporting agencies at AnnualCreditReport.com. Show him your own credit report and explain how to read it.

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