Intro to Credit: Youth Edition

For our final #FinancialEdFriday, we’re providing tips on how to discuss credit and financial wellness with the youth in your life.

Before we dig into the topic of credit, it is vital to first introduce spending, budgeting, and savings to begin a baseline for good money habits.

Spending

Understanding spending is an important skill at any age. It’s important for children to recognize that purchases cost money, and that money is a limited resource. Budgeting and expense tracking go hand in hand with spending, ensuring you are spending within your means, and on track to reach your financial goals. Showing your children the process of budgeting and keeping track of your spending will help your kids better understand the value of money.

Start saving as early as possible:

It’s important for children to understand that saving is essential to getting what they want. To do that, they need to recognize the importance of saving with a purpose. When it comes to the actual act of saving, teach that creating (and sticking to) a goal is key. Use the activity below to help introduce the idea of savings goals. Encourage your child to save a regular percentage of their allowance/income or a certain amount each month. As an incentive to focus on saving, consider making a matching contribution such as adding 50 cents for every dollar your child saves.

Saving Activities

Create a Savings Goal: Help your child set a saving goal. Children’s goals vary depending on their age, but might include toys, sports equipment, electronic devices, special clothes, or other big-ticket items. These can also include short and long-term goals such as a $25 game that may take a few weeks to save up for, versus their first car that may take a couple of years. Let them discover for themselves the value of money and that sometimes an object isn’t worth the time and effort it takes to save up for it. Once they’ve set a goal, create a clear way for them to track their progress. The more visible, the better. For example, a jar in the living room or a paper chain that you cut pieces off of for each milestone. Including an image of what they are saving for can also help them visualize and stick to their goal. This will remind them of their goal and give you both the chance to celebrate progress.

Open a Savings Account: Take a trip to your bank or credit union and help your child open their first savings account. You can even ask an expert at the financial institution to explain concepts such as interest and why it’s wise to store your money in a savings account. Encourage your child to ask other questions about how financial institutions work. You may even choose to contribute a little to help get their fund started.

AAGCU offers two youth savings accounts, Take Off Youth Savings for members 12 and under, and Altitude Teen Club for members 13 – 18. Both earn dividends with our competitive rates. Visit our website to learn more: https://aagcu.org/youth-account/

Teaching children about credit at an age-appropriate level can be a difficult task, but it is important to begin having these conversations as early as possible. To help you get started, we broke down tools to breach the topic of credit at different ages.

Elementary age:

Discussing finances with your elementary aged kids can be tricky. As they are first introduced to money, this is a great opportunity to begin discussing the difference between credit and debit with them. This can be done in a fun/interactive activity.

Teachable Moments:

The easiest way to explain credit versus debit is by showing kids that credit isn’t owned but is borrowed money that you have to give back. Kids start to understand the concept of ownership at a young age. An explanation of credit can be something as simple as, “It’s like when Timmy lends you a pencil, you have it and you can use it, but you have to return it afterward”. Though credit is more complicated than that, the most important thing for younger kids to recognize is that using credit means using borrowed money, not owned money.

Activity:

Credit GoFish.

What you’ll need: Playing cards, of any sort, so long as they can be matched—GoFish cards, normal playing cards, uno cards, etc.

Instructions:

Tell the kids you’ll be playing a simple borrowing game. Their goal is to get as many matching cards as possible.

Have each one start with five cards and put the rest of the cards face down in the middle. Next, instruct the kids to lay their “money” or cards down for everyone to see.

Explain to the children that the goal of the game is to have the most matching cards in the group by the time the middle pile runs out or no one can make any more moves. BUT…warn the kids that there are two simple rules.

Each turn, a player can choose to “borrow” one card from another pile in the circle or pull from the middle. (This represents the idea of borrowing money or credit.)

In order to keep whichever card they take, they must give up one of their cards. (Though the card they give back might be different, reiterate that the lesson is to return a card for a card, no matter that card. This represents paying back credit.)

The kid at the end of the game with the most matches wins.

For more interactive online activities, check out our financial wellness partner Banzai Junior to explore topics such as

• IOUs (Introduction to credit)
• Earning money
• Counting currency
• Saving and spending
• Working with others

Middle School age:

Once kids reach middle school age, they typically have a basic understanding of money. Either through math classes, allowances, or neighborhood odd jobs, kids at this age are ready for more complex ideas around money. This is a good age to begin introducing the concepts of credit scores and credit cards.

Teachable Moments:

You can introduce your middle schooler to credit scores by comparing it to what they’re already familiar with; grading. Explain to them that a score of 300-579 is considered “poor”, and similar to an F grade, 580-669 is considered “fair” and is similar to a D grade, 670-739 it is considered “good” and is similar to a C or passing grade, 740-799 is considered “very good” and is similar to a B grade, and 800-850 is considered “exceptional” and is similar to an A grade.

The better their “grade,” or credit score, the more likely they will be approved for loans when they get older and need to borrow money to buy things like a car or a house. They will also be more likely to get better terms and rates on loans, and higher limits on credit cards. By correlating credit scores to a letter grade, it can be more easily digestible.

It is also important to note that a credit score isn’t something that magically appears. It is built over time through actions someone makes when they start borrowing, including a history of on-time, in-full payments. It is important to begin teaching these concepts to middle school aged kids, so they can begin practicing good borrowing habits.

Activity:

You can teach this concept by allotting them a certain number of points or fake money each week or month. These points can be used to win little prizes throughout the week or even remedy the absence of a school supply like a notebook or a pencil. Once the child uses all the points for the week, they can be given the option to use points from the following week on credit—so long as they understand they will have to pay them back with their points next week, meaning they won’t be able to use them then. You may even consider charging interest for points or money used on credit. This will teach them that borrowing isn’t free, so when possible, it is better to wait until you can afford something outright before purchasing it.

This could also be taught with real money. If they want to purchase something they do not have enough money for, you can give them the difference in the form of “credit” and have them pay you back by a determined date.

For more interactive online activities, check out our financial wellness partner Banzai Teen to explore topics such as

• Earning money
• Working with others
• Daily spending and saving
• Auto insurance
• Credit

High School aged:

For those high school aged, this is a typically big transition. They are at the age where they can get their first job, buy a car, and start filing taxes. Once they’re 18 they can apply for their first credit card. This is a great age to begin introducing credit history to them.

A credit report contains a history of borrowing habits for every credit user. A good credit history allows lenders to evaluate the likelihood of someone’s ability to repay, and helps influence the rate, terms, and amount they can loan to that person. Since credit is such a vital part of post-teen life, it’s important for kids to start establishing a credit history as soon as possible. Explain that credit history begins when someone gets their first credit card, takes out a loan, or becomes an authorized user on their parents credit card. This means that they need to be using credit carefully right from the start to build up good credit. Here are some ways for them to get started:

Find a Job: To get a credit card, they’ll need to prove that they have the income to pay back anything they borrow.

Apply for a secured credit card: Choosing the right credit card can be a difficult process, especially when it’s someone’s first time. At the age of 18, they’ll be able to start applying for credit cards. Secure credit cards are great for a first timer because it is easier to get approved even without credit history and they have a lower limit than traditional credit cards.

Become an authorized user on their parent’s card: At the age of 18, parents can add a child as an authorized user on their card. That child doesn’t necessarily even have to use the card for it to positively affect their credit score.

Yearly fees and interest

Keep in mind, many credit cards have an annual fee. It’s best to choose a credit card without an annual fee—especially if you’re just getting started. Explain that on top of watching out for annual fees, it’s important to be mindful of APRs (annual percentage rates) or the amount of interest charged over 12 months. The interest must be paid in addition to the amount borrowed. Just remember, when choosing a credit card, a lower interest rate and a small annual fee (or no annual fee) is usually better.

As your child begins their journey into the world of credit, it is important to begin teaching them how to use it responsibly. Here are some tips:

• When possible, do not carry a balance on your credit card, especially if it has a high APR.
• When first beginning to use a credit card, it can be a good practice to pay off any balances immediately after making the purchase. This will still help build credit and reduce any risk of forgetting to make a payment.
• Only use the credit card for purchases you would already be making. This will help you stay within your budget and on track with your financial goals.
• Keep spending to under 30% of your credit limit. It can be tempting to see a high credit limit and want to spend all of it, however, it is important to remember that you will still be on the hook to pay it off, and spending over 30% of your limit can actually negatively impact your credit score.

For more interactive online activities, check out our financial wellness partner Banzai Teen to explore topics on how to navigate daily decisions such as

• Buying a car
• Renter’s insurance
• Taxes and withholding
• Daily spending and saving
• Auto insurance
• Credit

Financial literacy and wellness can be taught at any age. If you have any questions, feel free to contact us at (206) 824-9800 or by email at info@aagcu.org. Contact the loan department directly at loans@aagcu.org or call 206-824-9800 (option 1 for loans) to get the conversation started.

Thank you for tuning into #FinancialEdFriday and learning the ins and outs of credit. If you have any topics you want us to explore, let us know below!