Teaching Credit Concepts to Children

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A year ago, I wrote a blog about how my spouse and I taught our daughters about entrepreneurship. The article focused on how we helped them start their own bead craft business. We helped them develop a business plan, factored in costs and fostered innovation.

We also implemented the Bank of Dad concept, where the girls receive interest payments at the end of each month for saving their allowances and other earnings. 

So far, it has been a positive experience. I no longer feel obligated to vet each of my daughter’s purchasing decisions; if she has money in the bank, she can buy what she wants.

A few months ago, my daughter wanted to buy a pricier item but she lacked the funds to make the purchase. (For the record, my wife’s daughter is a major saver, so we have yet to face this particular issue with her.) I could have rejected the purchase, but I thought about it and decided that it was time for the 11-year-old to learn about credit.

The tricky part was balancing a real-life scenario with terms that the fifth grader would understand. The Bank of Dad was already paying a generous 10% monthly interest rate for her deposits. Don’t get any ideas; this bank only has capacity for one depositor!

So I decided to let her open up a line of credit with a credit limit equal to a month of allowance money. For her, that was $12. I also informed her that she would have to pay the money back at a 15% interest rate. She complained at first, asking why the borrowing rate outweighed the deposit rate.

“We treat the Bank of Dad as a real business,” I told her. “Just like your bead business, it is intended to make money. To do this, it has to make more lending money than it pays out holding money.”

By and large, the process has worked. Whenever she has a deficit, I take 15% out of her weekly allowance and apply the rest of the money to the debt. She can also work and earn more money, which can then be used to more aggressively knock out the loan. Since I limit the credit to a month of allowances, it only takes her a few weeks to pay off the debt.

I decline her purchasing requests if she reaches her credit max, which has happened occasionally. She protested the first time this took place, but she has now gotten accustomed to watching her credit balance and is making better financial decisions.