How to Teach Your Child About Loans and Interest Before Going to College

College is an exciting time for teenagers, and for most, it is the first time living outside of the family home. At this age, your children need to be on their own and make individual decisions about their actions, education and finances. To make sure that they are well prepared to deal with the decisions that exist during the college years and beyond, spend some time teaching them about loans, borrowing and interest before they are ready to leave the nest. By preparing them early to make smart decisions, you can prevent them from going into debt at an early age or borrowing more money than they can repay. Here are the top four ways to teach children and teens about loans and interest.

Start With Saving

In order to avoid having to borrow large sums of money in the future, children and teenagers should start saving at an early age. This shows the benefit of delayed gratification and helps them learn not to spend all their money as it is earned. Children who earn five dollars as their weekly allowance might want to be encouraged to set one dollar aside each week. This can go in a special savings jar and eventually their first bank account. As this becomes routine, they will be able to see their savings grow. Allow them to periodically take out some money from their accounts for a large purchase. For young children this might be a new toy or video game while for teenagers it might be a used car or even a vacation with friends.

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Show Teens Your Credit Card Bills

There is no better way to help teenagers understand the consequences of using credit cards than by showing them your own bills. Carefully explain all the details on the bill and make sure they understand all about the interest you have to pay each month. Have a discussion with them about why this can be frustrating, when might be an appropriate time to use a credit card and when would be inappropriate.

Let Your Teen Borrow or Lend Money

The best way to help children understand how interest works from a young age is to let them lend or borrow money themselves. Start by asking to borrow a small sum of money that they have saved up. For example, you might ask to take 10 dollars from your child but offer to repay them 11 dollars at the end of the week. This will help them to understand interest in their favor. When they ask for a large advance on their allowances or want to buy something special, offer to lend them the money using the same formula. Make it clear that the money must be paid back, even if their allowance needs to be docked each week in order to make that happen.

Give Them a Practice Credit Card

Consider giving your child a practice credit card to get the idea of how they work. Use a plain index card and every time money is needed, write the amount on the card along with the interest rate. Over time they will be able to see how easy it is to get into debt and how important saving can be.

With these tips for teaching children and teenagers about credit cards, interest and loans, they will be prepared to make smart financial decisions in college and beyond.

Guest author Sharon Koontz is a financial guru and freelance blogger writing on behalf of www.nowaitloans.co.uk.

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