Teaching Children About Credit Cards

With the past 18 months reminding us to be thrifty, many parents are realizing the importance of teaching children about credit cards. In particular, we need to teach children how to build credit by using credit cards wisely and, perhaps more importantly, how to protect their finances from misuse of credit cards.
Though the Credit Card Act of 2009 intended to protect consumers from the credit card industry, the truth is that we should be equally concerned about protecting consumers from themselves! Without proper education, our children risk repeating our mistakes. Indeed, “just charge it” seemed a mantra in the 1990s and early 2000s. Middle-class families ended up paying tens of thousands in interest rate debt.
Leveraging the lessons we learned from the recession, we should all begin teaching children about credit cards so that future generations 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. I know this sounds crazy, so let me clarify: I do not think you should give your child unlimited access to a credit card with a $20,000 limit. That would be a recipe for disaster.
But how about handing 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.
And how about older children? Teaching children about credit cards can continue when your children enter their teen years. 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, charge a late fee.
Do not, however, get angry or ground your child. When teaching children about credit cards, try to establish a scenario that would happen in real life. 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.
In fact, you should embrace a mistake that your child makes while at home. Learning lessons early, when the repercussions are minor, is far better than learning them when the stakes are high.