By Gail Vax-Oxlade
Some people think that credit cards are evil and that keeping kids on the other side of the moat is the only way to keep them safe. But that assumes that credit card companies will never breach the castle.
Hey, it’s only a matter of time. Far better that kids know what to do with plastic when they finally have some in their hot little hands. And who better to teach them than you?
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. 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. That’s because they’ve had no prior experience with how a credit card works, or how to use one so that it’s a tool and not a Debt Pit.
All it takes is a little time and a thoughtful approach to help your children see credit for what it is: useful when used correctly, deadly when it isn’t. When you use your credit card to purchase gas or pay for a new bathing suit, take the time to explain how credit cards work. Show your children that you’re only putting on the card what you can afford to pay off when the bill arrives. Explain that you use your card for good reasons, not just to scratch your consumer itch, because this debt has to be repaid.
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. It should clearly state:
How much credit she can use: “Charges can be made to this card up to a credit limit of $40.” When the statement will arrive: “Statements will arrive on the 15th of each month.”
The date by which it must be paid—called the “grace period”: “Payments must be made by the 30th of each month.”
The minimum payment required: “The minimum payment is 25 per cent of the outstanding balance.” How much interest will be charged if the balance is not paid off in full: “If the balance is not paid in full and on time, interest will be charged on the entire balance at a rate of 25 per cent a year or 2 per cent a month.”
It’s important that you use a fairly high interest rate in your agreement. If you wuss out and charge just 5 per cent a year, the lesson that using someone else’s money can be expensive is likely to get lost. Charge a whopping amount of interest (hey, department stores charge more than 24 per cent), and the lesson will be made more real for your kids.
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 if she doesn’t have the money at home ready to pay the card off in full when the bill comes in, she’ll have to allocate her future allowance (or babysitting money) to pay the bill when it arrives. Make the point clear: she is spending money she hasn’t yet earned, and she’ll pay interest to do so if she can’t come up with the money in time.
If she spends more than she can afford, or makes her payments late, you’ll have to charge her interest on the balance. Use 24 per cent as your interest rate for this exercise, and don’t give in. To calculate the interest, multiply her monthly balance by 2 per cent (which is the equivalent of 24 per cent a year). So if she owes $16.50, the calculation would look like this: $16.50 x 2 ÷ 100 = $0.33.
Point out that she is paying that 33¢ for having used your money for a month. It is like she “rented” the $16.50 for a month, and the cost was 33¢. And if she doesn’t pay it off soon, it will continue to cost her money every month to keep “renting” the money she’s charged on her credit card.
Once your child is 16 or so (you’ll have to gauge his maturity), you may wish to get him an actual credit card (it will have to be in your name since only those 18 and older can have a credit card of their own) and start him using it and repaying it regularly. This is a habit, and one well worth the effort to form. By the time your child is 18, he should have a card in his own name so he can start building a credit history.
There are many people who don’t know how to use credit appropriately, all because they never developed the discipline of self-regulation through practice. Not all kids will be suited to using plastic. Not all adults should be using plastic. Be honest about your kids’ organization and sense of discipline. If Molly just doesn’t have the wherewithal to manage credit smartly, tell her that she isn’t well suited to using credit cards and that, until she develops some discipline, she should avoid them like the plague. Your own values will also come into play when it comes to teaching kids about how to spend money. Whether your family lives on cash or uses plastic, talk with your children about the choices you’ve made and why. And remember that they’re always watching, so be mindful of how your use of plastic influences your children.