57% of Families Are Teaching Their Kids This Crucial Lesson. You Should, Too

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Are you teaching your kids about debt? Read on to see why you should. [[{“value”:”

During the fourth quarter of 2024, U.S. credit card debt reached the $1.05 trillion mark, according to TransUnion. That’s up from $931 billion — an already large number — during the previous quarter.

Sometimes, credit card debt comes as a result of tough financial circumstances more so than reckless spending. But part of the reason credit card debt may be so prevalent among U.S. consumers is many don’t really understand the dangers of racking it up.

That’s why it’s so important to teach your children how credit cards and debt work. And there’s good news there. Data from Empower show that 57% of families are doing just that. If your children are old enough to discuss financial matters, here are some key points about credit and debt to touch on.

1. How compound interest works for credit cards

In the context of investing, compound interest is a good thing. It can help you turn a modest amount of money into a much larger sum over time.

But in the context of credit card balances, compound interest can work against you in a really serious way. As you accrue interest on a credit card balance, that interest is then added to the sum you owe so that when more interest accrues, you’re paying interest on interest.

All told, even a small credit card balance has the potential to turn into a large one over time because of the way interest accumulates. So make sure to stress the importance of paying off credit cards in full whenever possible.

Also, you may want to actually show your kids — with numbers — just how much a seemingly innocent credit card balance might escalate. You might, for example, start off with a $1,000 balance you need to carry forward. But if it takes you five years to pay it off on a credit card with a 24% interest rate, you’ll end up spending $726 extra, or $1,726 in total.

2. How credit card rewards work

Credit cards tend to get a bad rap as a financial product consumers should avoid. But that’s not a healthy approach to credit cards.

It’s not a great thing to carry a credit card balance forward due to the whole issue of interest just discussed. But when you pay off your credit cards in full every month, they can help your finances by putting rewards or cash back in your pocket. You may want to tell your children that it’s perfectly OK to use credit cards for recurring expenses like groceries and gas as long as they’re paying the bills in full.

3. How debt isn’t necessarily a bad thing, provided you can manage it

The word “debt” tends to have a very negative undertone. But the reality is that not all debt is a financial mistake, and it’s important that your children understand that.

Indeed, it’s generally best to steer clear of credit card debt due to the costly nature of it. But there’s nothing wrong with taking out a reasonable mortgage to finance a home purchase. Doing so could help your kids grow their net worth in a meaningful way.

That said, it’s important for your kids to make sure that any debt they take on is one whose payments they can handle. If they sign up for a $2,000 monthly mortgage and can swing that sum with ease, then there’s really no problem.

A big reason some consumers run into trouble with credit card debt is that they don’t fully understand how it works. So if you teach your children about credit and debt, you can put them in a really strong position to make savvy financial decisions once they leave the nest.

Of course, these aren’t conversations you’re going to have with your 8-year-old. But they’re great ones to have with your teens. And they’re definitely worth discussing with any kids you have who are going off to college and are looking at managing money on their own to at least some degree.

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