Part 7 – Teaching Kids About Credit
Posted by Gail | Filed under Kids & Money
Funny Money: When was the first credit card made, and who made it?
The first time most kids learn about credit is when they go off to university and the credit card companies start throwing cards at them. Hmmm. With no experience and very little understanding of the long-term negative ramifications, kids start to charge. And they charge, charge, charge until they’re in a hole. Did you ever take the time when you were using your credit card to purchase gas or pay for a new bathing suit to explain how credit cards worked? Did you take the time to show your children that you’re only putting on the card what you can afford to pay for when the bill arrives? Probably not.
Even relatively young kids can get in on this lesson. Issue your 10-year-old a credit card on The Bank of Mom & Dad. (Have her design it herself, if you like.) Draw up a cardholder’s agreement that both of you sign. Set a really low credit limit ($10 is lots), and a deadline for paying it off before interest charges apply.
Your child can now use her credit card when she goes shopping with you. If she sees something she wants to buy, she gives you her card and you make the purchase on her behalf using your money. You give her a charge receipt. Remind her that she’ll have to save her allowance (or babysitting money) to pay the bill when it arrives.
If she spends more than she can afford, or makes her payments late, you’ll have to charge her interest on the balance. Use 25 percent as your interest rate for this exercise, and don’t give in. When she sees that the $10 item actually costs $20 over the long run, she’ll know that credit cards should be used with caution.
Once you’re child is sixteen or so (you’ll have to gage his maturity), you should get him an actual credit card (it may be in your name) and start him using it and repaying it regularly. This is a habit, and one well worth the effort to form.
Don’t skip steps because you think they should be obvious to your teenager. Start by explaining how credit cards work. Emphasize the connection between charging one month and paying the next. Stress that credit is not “free money” unless the balance is paid in full before the grace period expires. Explain interest and how it compounds if a debt piles up. Read the fine print and review key terms such as late fees and over-balance charges. Talk about how to keep the card safe, and what to do if it’s stolen or lost.
Set limits and monitor your child’s use of the card. They must prove their ability to handle the low limit you’ve established — $100 is good to start – before you increase their responsibility. When they are old enough and ready for a card in their own name, encourage them to shop around for low rates and fees.
Discuss the importance of a good credit history and how a bad one can get in the way of future borrowing, whether they need to buy a car, rent an apartment or get a mortgage for a house. Show them how to get a copy of their credit report.
The U.S. Treasure has created an online interactive game called “The Bad Credit Hotel.” http://www.controlyourcredit.gov
Next week is the final part of this series: The Messages You Send
Funny Money Answer: The first credit card came out in 1951, produced by American Express.
BTW, Thanks to all who completed the questionnaire yesterday. Lots of great info there. And clearly y’all feel there’s a need for some consolidated, focused effort in teaching kids about money. I’ll summarize next week. In the mean time, encourage friends and family to do the survey so we can get a great sampling. Purrrrhaps the media will pick up on this a bit more and we can have a national discussion. Hmmm.
April 2, 2009 at 1:08 pm
I’m ready to take on this challenge!
I love the idea of doing a little card up for my boys that they can charge to. Up to now we have put a big guilt trip on when they have borrowed anything for an impulse buy. I think your technique will be more constructive….
April 2, 2009 at 2:11 pm
This is not about kids, but all this has been saved and stored for when my kid is big enough.. excellent idea with the credit card.
Just wanted to share how I saved some money this month.
I had a very aggravating exchange with Rogers this month. They fubar’ed my bill (380$ in march???).
Spent about 2hrs on the phone with them until I got to the top (peoplez, if you want to get their attention, always ask for their cancellation department right away), where they figured out the problem (theirs. really, truly theirs).
As I was getting more and more annoyed, I started cutting my services with them. One by one, from the hip. Bang! no additional features on my cell. bang! for Mike either. Bang! reduced internet to lite. Kaboom! no cable AT ALL. That, I believe, is called collateral damage.
April 2, 2009 at 6:52 pm
I was watching Suzie Orman, and a woman who was 18 called in and said she never realized you had to pay back the credit card company! Wow, she maybe wasn’t very swift, but obviously the whole concept had escaped her…and the way we (parents) talk about credit I’m sure influences this.
BUT, I’m interested to see what the results of the survey from yesterday are!
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July 28, 2010 at 8:26 am
Great article man Thank you
July 28, 2010 at 10:24 am
Thx ! nice text