This is the third article in our series, “Talking to Children About Money.” In this article, we explore valuable lessons to teach kids about using credit cards and why it’s important to engage in this practice for a lifetime of good credit.

4 Valuable Lessons to Teach Kids About Credit Cards

While it’s not likely small children will need access to a credit card, it’s a good idea to introduce the concept of credit while you’re teaching them about money. After all, they likely observe you using a credit card on a frequent basis, and should at least know they’re not magic cards that pay for things whenever you want something.

For younger kids, it’s helpful to frame the concept of using credit cards in terms they can understand. For example, if they want the latest LEGO set that costs $100 but they don’t have the money to buy it, you might start by suggesting that there are several ways they can purchase it including:

Option 1:  Wait for a birthday or the holidays and ask for it.

Option 2:  Use all their savings obtained through presents and allowance.

Option 3: Borrow money from mom or dad to cover the entire cost of the LEGO set, or at least a portion of it. Buy it and then pay mom or dad back, with interest or added fees if the full amount is not paid back on time – also known as credit.

Option 3, using credit, might sound easy and appealing to a kid but there are important considerations that go with it.  Here are some of our top lessons to teach your children good credit habits:

1) Credit is not your money and the longer it takes to pay it back, the more it costs. It’s important that kids understand when using a credit card, you’re essentially using someone else’s money to buy something.  In the case of a credit card, it’s the bank’s money. If you have a job and pay your bills responsibly, a bank will give you a credit card to make purchases even if you don’t have the money in your wallet. If you pay the bank back on time, you don’t owe any additional money.  But if you can’t pay the money back on time, they will charge you a fee called interest. So if you spend $100, and let’s say the interest adds up to $25 over 3 months, your LEGOS are really costing you $125.  That’s a price hike of 25%!

2) Credit cards don’t mean you can buy everything you want. To a child, it can be difficult to understand limits. Unfortunately, it’s a foreign concept for some adults too. It’s critical to explain early on that just because a bank issues you a credit card, it doesn’t mean the sky’s the limit when it comes to using it. Like money skills, teaching healthy credit habits early will make for a lifelong strong credit history. It’s like grades in school – the better they are, the more favorable you look when it comes to getting into college. The same can be said for credit – the stronger your credit history, the more likely you’ll be to own your own home or car, or even get a good job to pay for your expenses.

3) Credit card companies don’t wait for payments. As parents, we can have a ton of patience when it comes to dealing with our kids. The same cannot be said for creditors. It’s important to explain to children that credit card companies expect you to pay your bill at the end of the month, or whenever it’s due. And if you miss a payment they will remind you – and not like a parent reminding you to clean your room or do your homework. They’ll charge fees, send letters, stop the ability to use the card and worse, possibly ruining a credit history for years to come.

4) Only use credit cards if you have the money to pay it back. Teaching your child healthy money habits is critical. If they develop a solid foundation on the concepts of earning, saving, sharing and investing money, they’re well on their way to having a healthy credit history. The best lesson you can teach your children about using credit cards is the same you teach them about money in general. Before you buy something (or in this case, use a credit card) make sure you have the money to pay for it. Using cash is a simpler concept to grasp since if you have no physical money, you probably won’t buy something. But the temptation of using a credit card to buy something, even if you don’t have the money to pay for it in your wallet, is very enticing.

About Lemonade Day

Lemonade Day is a non-profit dedicated to teaching every child across North America the business and financial skills that are the key ingredients of entrepreneurship. By learning these skills early in life, children will be better prepared to be successful, financially healthy adults. Through our fun, hands-on program, kids K-5 are empowered to start their very own business—a lemonade stand—and experience the feeling of earning real money, using 100% of their profit to spend, save and share based on their own goals.

Visit LemonadeDay.org to learn how to participate in a Lemonade Day in your city.