What Children Should Know About Credit

“Charge it” is a phrase children hear when shopping with parents. It seems so easy to give someone a piece of plastic and get whatever we want. But is that the lesson we really want to teach our children?
Parents have learned the value of thriftiness during the past 18 months. Some parents also realize the importance of teaching their children about credit cards because it is never too early to give them a foundation in buying with credit. If children learn how to build credit by using credit cards wisely, they’re ahead of most people when it comes to credit. Teaching children how to protect their finances from misuse of credit cards is even better.
The Credit Card Act of 2009 protects consumers from the credit card industry which is great. However, we should be equally concerned about protecting consumers from themselves! If we don’t educate our children about credit, they risk repeating the same mistakes we made. “Just charge it” was a mantra in the 1990s and early 2000s. As a result, middle-class families ended up paying tens of thousands in interest rate debt.
Parents should pass on the lessons learned from making poor credit decisions.
What should our children know about credit? As much as we can teach them! If we give our children a foundation in using credit wisely, future generations will make wiser choices when it comes to charging debt.
Teaching children about credit cards starts at home by allowing your children to make small, approved purchases with your existing credit cards. This does not mean making them an authorized user and giving them unlimited access to a credit card with a $20,000 limit. That would be a recipe for disaster.
Instead, hand your seven-year-old daughter your credit card when she wants to purchase an $11 toy. Allow her to participate in the process by handing the credit cards to the cashier. Tell her to hold onto a copy of the receipt showing you how much money she owes you. Then have her repay the debt by handing you cash she earns from household chores or an allowance.
Are your children older? No problem. As your children enter their teen years, they should learn even more about credit. Hold monthly finance and credit meetings where you review credit card statements, discuss interest rates, and explain how the credit scoring systems works. Consider your own “credit card score,” a term I coined to describe how helpful a person’s use of credit cards is in building his or her credit score.
If your finances (and your utilization rate) can handle it, allow your teenager to make a larger purchase. Then charge interest. If your child fails to make a payment on time, practice tough love. Charge a late fee they must pay before being allowed to use your credit cards again.
Do not, however, get angry or ground your children when they fail to make a timely payment. This is an excellent teachable moment for your child. Explain how late payments affect their credit score and how their credit score affects the interest rate companies will give them.
Keep examples grounded in reality—try to establish a scenario that happens. The credit card companies would never ground a customer for failing to pay a bill on time. They would, however, call their customers at 8 a.m. to remind them that the bill is due. Feel free to call your teenager’s cell phone at the crack of dawn to remind her that her payment is past due.
Mistakes happen! As long as your child does not repeatedly make the same mistake, allow her the freedom to learn and grow while at home. Be your child’s safety net now. It’s far better than being their safety net when the stakes are higher.