Teaching Kids About Credit
Posted by John Draper | Filed under Credit Wise, Kids & Money
If there’s one thing we’re no damn good at it’s handling credit. Fully fifty per cent of us carry a balance, racking up scads of interest and making life painful for ourselves and our partners. And the bad habits start early. Kids walking the halls of higher learning are often inundated with credit card offers at the time when they are least capable – financially or experientially – of handling credit.
Can you imagine walking into a bank and saying, “Scuse me, but I don’t have a job, and I’ve never had credit, may I have a credit card please.” Now imagine the bank manager busting a gut, tears steaming down his face as he laughed you all the out of the bank. Yet every year credit card companies issue thousands of cards to unsuspecting students who have no visible means of repayment and don’t understand the impact of failing Credit Management 101.
“If Only I’d Known” is the mantra of dozens of people who’ve gotten themselves into the deep end only to realize that it could have been avoided if they’d had a little experience with credit. But since as a culture we’re divided into the “credit is baaad” camp and the “give me more” camp, the likelihood of kids learning a balanced lesson on credit is limited. Want to change that for your children?
As early as ten, you’re kids can start learning about how credit works, when it use it, and how to spend only what you can afford. You start by issuing your child a credit card on the Bank of Mom. Have her design the card, draw up a cardholder’s agreement that you both sign, and you’re away to the races.
What goes into the cardholder’s agreement? Well, that’s where you lay down the rules: how much credit she can use (the “credit limit”), when her statement will arrive, how much time she has to pay (that’s called the “grace period”), and the minimum payment required. Most importantly, it sets out how much interest your child will have to pay on her balance.
Now before you come shrieking at me, “User, Bad Evil Mother,” remember the point of the exercise. You want your kids to learn the reality of credit use. That mean they have to learn that when you use someone else’s money to buy stuff, that stuff costs more.
Which brings us to the next point: You’ve got to charge your kids 28% a year or more – like a store card — to get the message through, otherwise the interest is not painful at all, and they end up learning the wrong lesson.
Now that your child has his own credit card, he can use it when he sees something he wants to buy but doesn’t have any money in his pocket (the same way we all use a credit card). He gives you his card. You make the purchase on his behalf (using cash or your card). You give him a charge slip to sign (a receipt book will do nicely for this). And you return his card and charge slip.
At billing time, you total his charges and present him with a bill that shows the minimum payment and the total outstanding balance. In a perfect world he pays you back in full. More likely, he makes a partial payment and carries a balance and you’re in the business of calculating interest (Now no one said parent-hood was easy! But you might learn a lesson or two here yourself.)
If your child charges more than she can repay, or if she does not make her payments on time, you can decline to accept future charges, repossess the items purchased until they are paid for, and garnishee her allowance to repay the credit. (You could also raid her savings account and take back your money – which a bank can also do – but I wouldn’t advise it since that sends the wrong message about what savings should be used for.) Also suggest she keep a notebook where she records how much she’s spent so she can anticipate her bill and know when to stop shopping.
It’s way better for your kids to experiment with credit in the safety of your arms. As adults, the embarrassment (or worse, the entitlement) they feel when it comes to credit is way overblown. Start early with the credit lessons, give them lots of opportunity to learn, and let them fail where they can learn the lessons without too much pain. By the time they head of to life on their own, they’ll have mastered their own possibilities.
May 23, 2008 at 1:26 pm
You are wise….
My oldest just got his first “job” yesterday! He is just 11 years old and just started a rather large paper route. I took him over 2 hours and he was crying by the time he was done (the wind messed up the papers big time!).
He has been mowing lawns for cash around the neighbours… we bought a reel puch mower at a garage sale and he works hard with it.
He is saving up for something BIG!
BUT After yesterday’s disasterous first run with the papers, I think he may be disheartened…. poor guy, he has a special thing to save for, and we said he would have to save for it on his OWN.
I know you have mentioned it before…. the relationship of CHORES and ALLOWANCE. (I’ll have to search for it) We haven’t started the allowance thing yet, mainly because I didn’t need him blowing it on candy and little crap toys. Now that he has a focus, it is time to start.
I am very proud of him.
May 23, 2008 at 4:40 pm
Wow. I actually can’t wait until my son is about 10 so I can try this. He’s six and we’re just navigating “allowance land”.
May 24, 2008 at 3:15 pm
My hubby doesn’t believe we should give the kids any allowance…. he was taught that “free bread has tough crusts” and so they don’t respect the money if it’s free. I brought up your points about the lesson IS the money (saving, managing, etc) but he wasn’t seeing it. I am a bit frustrated by that, but it won’t work unless we both agree.
May 24, 2008 at 10:19 pm
Tracy J:
How about matching funds? Once the child earns half the amount, you supply the other half. Some parents use allowances for fun stuff while others for clothing and little necessities (especially as teenager) while fun stuff must be earned (or used form the allowance). You might find a balance for both parents and child.
May 26, 2008 at 8:38 am
I’m of the camp that chores can be linked directly to allowances for children, and my reasoning for that is that although I don’t get paid to clean my house, I do get paid to “help out” by means of my job. So for my children, they get paid for their “helping out” by means of their jobs/chores. If I had a cleaning service clean my home, I’d have to pay them, so the kids are learning that some hard work (really, not that hard: sorting their own laundry, alternating who cleans their bathroom, and the odd room clean-up session) results in monetary reward. And having a clean house and helping Mom and Dad so we have more time for family bike rides is a bonus for them. They get a weekly allowance of their age minus $1, with the idea that that $1 gets deposited directly into their bank accounts. I’ve been depositing $10 each per month just so they think they’re saving more, which may be a downfall later when they do the math (hmmm, Mom takes $1 a week away from my allowance and with interest I end up with $6 extra per month? Score!). But for now they see the savings as a bonus every month, and they’re more interested in putting some of their allowance money in there to build it up faster when they’re saving for things like Build-a-bears and skateboard gear. Win/win in my books!
May 26, 2008 at 9:02 pm
i would think that ‘when you go to work you earn money’ and ‘when you don’t go to work you earn nothing’, is a simple and easy lesson. everyone does something, either in an office or in the home. not too many people are unemployed by choice or living off the generosity of others. the tough bit is what to do with the money you’ve got, no matter how much or how little and to learn how much it costs to live.
had i been smart enough, as a kid whenever i left the lights on and my dad said ‘do you know how much that costs, it doesn’t grow on trees’, i’d have responded ‘no, i have no idea’!!!
kids need a cashflow, otherwise they won’t know how to manage money. they are too young to get any real job, they’re job is school. the money is the lesson. getting $2 a week for taking out the garbage isn’t going to teach them to manage money in real life, maybe just teach them that they may or may not want to work in waste management.
tracy j- tell your husband that your kids aren’t getting an allowance, THEY are just managing the money YOU spend on them for their needs (with close supervision at first of course).
May 26, 2008 at 9:27 pm
Kristin, the points you make are dead on. I define an “allowance” as the money you normally spend on your kids put into their hands so they can learn to manage it. I believe some money, given regularly, is important for learning how to prioritize, how to monitor and how to plan using money. Work for pay — chores for extra money — is fine, particularly when kids are trying hard to achieve a particular goal. But the “allowance” is the building block for creating a familiarity and skills with money. GVO
May 28, 2008 at 6:54 pm
thnx
my daughter still eats the coins, but when she realizes the TRUE value of money (and the lack of nutritional value), we hope to implement this plan. and we hope it works too!