Many kids and teens are excited at the prospect of getting a credit card, but often for the wrong reasons. Combat their misconceptions early and they’re more likely to be smart credit card users when the time comes. No matter what your stance is on credit cards, it’s important to teach your kids about them before they get one in the mail.
Credit cards are a great tool when used correctly. However, they can destroy someone’s financial life, making other aspects much more difficult. If you feel that you don’t know enough about credit cards to teach your child, brush up first. There will be plenty of links on the web to learn more.
When is the right time? When your child starts asking, or in their early teens. Before you start talking about credit cards, make sure your child has a good grasp of basic money concepts. Let your child gain some experience spending their own money, e.g. from an allowance, a part-time job, or from doing chores. You might even let them borrow money from you a few times to demonstrate how loans work.
Important lessons to teach your child about credit cards.
Lesson 1: It’s not your money, you have to pay it back.
It’s not free, and the longer it takes the more it costs.
Make clear that your kid is using someone else’s money. With a credit card, the bank has agreed to let the cardholder borrow a certain amount of money over and over as long it's repaid. The balance can be repaid all at once or over time, but explain that the longer it takes to pay back the balance, the more interest they'll be charged.
Lesson 2: You shouldn’t rely on your credit card.
Because credit cards and debit cards are virtually identical, your child may have grown up thinking you’ve used your credit card for all your purchases. Teach your child that their checking account, which holds the money they’ve already earned, should be their primary way to pay for things, even big things. If they begin to rely on their credit card for regular things like food and gas, it’s a sign of serious financial trouble.
Lesson 3: There’s a limit to what you can purchase on a credit card.
Credit card issuers impose a credit limit – a maximum amount the cardholder can charge. Warn your child against charging big balances since that will keep them from being able to use the credit card when something important comes up.
Keeping a low credit card balance is most responsible because it’s easier to pay off and helps build a better credit history. A balance below 30% of the credit limit is ideal. Show your child to calculate the ideal credit card balance by multiplying their credit limit by .30.
Lesson 4: Your creditor isn’t ok with you missing payments.
Kids have to learn that everyone won’t as patient with them as their parents, especially not businesses and especially when it comes to money.
Explain to your child that the credit card issuer won’t knock on your door if for a miss a payment or several payments, but they will charge fees, call your home, send letters, and report late payments to the credit bureaus who will then let other creditors know about the delinquent payment. Eventually, creditors may decide to sue for an unpaid credit card balance, no matter the amount.
If you’ve cosigned on a credit card with your kids, make sure they understand that you are also penalized for their credit card misbehavior. And, like the creditors, you won’t be patient because your credit is on the line. Have a one-mistake limit – one missed payment, one over-the-limit transaction – and the account is closed for good.
Lesson 5: Don’t let your friends (or tv, internet, radio, store workers, etc.) influence your buying decisions.
Spending influences are everywhere so we all have to be in control of our choices, even with a credit card. Teach your child to make sound spending decisions and how not to be tricked by misleading ads. After all, they're paying the bill, not friends or family and certainly not radio and tv advertisers.
Lesson 6: Mistakes will follow you for years to come.
Credit card mistakes are hard to fix and even after being fixed, mistakes follow us for several more years.
A few consequences of credit card mistakes: a trashed credit report and damaged credit score. When it’s time to get a job, the employer checks the credit report, sees those mistakes and decides to hire someone with a clean credit history. Or, your child may try to rent his first apartment and the landlord turns him down because of outstanding credit card debt. It’s time to purchase a car, but your child can’t get a decent loan because of your past credit problems.
Credit cards may seem insignificant, but how we use them has a major impact on many aspects of our lives.
Lesson 7: You’re being graded.
Every consumer who borrows money, at least through a financial institution, has a credit score. The credit score is based on credit report information, a document that includes your child's credit card history. The most popular version of the credit score ranges from 300 to 850 with higher credit scores being better. Being responsible with credit will result in a better “grade.”
There's a point to having a good credit score. A better credit score will help your child qualify for better interest rates, get approved for loans in the future, pay lower security deposits on utility services, and improve the chances at getting other credit-based applications approved.
Lesson 8: Only use your credit card if you can afford to pay it back.
This will likely be the exact opposite of everything your child has thought about credit cards. Making charges you can’t afford to pay back leads to other credit card problems: missed credit card payments, late fees, higher interest, and a bad credit score.
Your child has to be in the habit of thinking about their income for the immediate future before making credit card purchases. If you are not going to bail your child out of their credit card mistakes, let them know upfront and stick to your word. Many kids are more likely to be responsible with their finances when they know mom and dad won’t cover up their mistakes.
Once your child has a credit card, check in with them every once in a while to see how things are going and to answer any questions, at least in the beginning. Make sure you’re giving the correct answers or point them to resources that will give accurate information.