Teaching Kids About Credit
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.