Growing up, I was always kept on the other side. Not intentionally of course, but due to lack of proper education. I never had the heart-to-heart conversation with my parents about credit cards. My parents never believed in credit cards, debt or even liked the idea of buy now and pay later. They always paid with cash. Eventually they came around to credit cards, only because they were forced to get one, if they ever wanted to buy their first home. Some credit history needed to be shown, so what better way than through credit cards from American Express.
Some parents think that credit cards are evil and that keeping kids on the other side is the only way to keep them safe. My parents just never had the time or true knowledge to share anything with me about credit cards. Eventually I turned 18, went off to university and got my first credit card. A short while later, while shopping at Canadian Tire, I got my first MasterCard.
Little did I know (and probably I was naive) about how credit cards operated, different interest rates, cash advance charges and that it sometime takes decades of monthly minimum payments to pay back what you owe on the credit card.
I was foolish and irresponsible with my credit cards. Sadly, everything came to an end. I got into major credit card debt and paid for it dearly. Despite all the ups and downs I had with credit cards, I’m glad it happened the way it did. Credit cards taught me a valuable lesson, which I learned the hard way - Only use how much you can afford to pay back.
So, as you probably teach your kids about money, you need share some lessons about being responsible with credit and credit cards.
Here are five golden rules to share with your kids about credit cards:
1. Explain How Credit Cards Operate
First credit card lesson should focus on how credit cards operate. It is vital to explain to your kids, that the available credit on the credit card, does not represent their money. All the money is the property of the creditor and credit card holders only borrow the funds at the time of the purchase.
Showing your child one of your credit card statements, and explaining that when you carry a balance, money is added to the total and in return you pay interest (profit to the creditor).
Kids must understand that credit cards are only a piece of plastic and the money is the property of the credit card company. Every time that credit card is swiped, they are borrowing money from the creditor.
And in order to avoid paying interest, they must repay the borrowed money at the end of each month.
Kids need to understand that credit cards are there for us as a convenience. They do not represent any of available money in the monthly budget.
2. Credit Cards Are Attached to High Interest Rates
Even the best credit cards are attached to interest rates. Kids need to understand, that credit issuers earn their money through these mostly high interest rates and annual credit card fess. Some interest rates are lower than others, but your kids need to understand that most credit cards are attached to 19.99% interest rate and most retail credit cards are attached to 24.9% or higher interest rate. Kids should also be taught that in order to reap the rewards of getting a credit card with a low interest rate in the future, they need to demonstrate a solid credit history of paying off their credit card in full and on time.
3. Importance of Paying on Time
This should maybe be the first rule. It is super important for kids to understand the importance of paying their credit card statement on time. I can’t stress this enough. As a parent, you should explain to your kid(s) that the credit card statement has a cut off date. For example, if its the 1st of every month, they need to pay their balance ahead of time. Not the day of, but ahead of time.
You, as the parent need to relay that the processing time takes sometimes up to five business days before the credit card company gets their money. So, if the credit card statement is due on the first of every month and the your child pays on the first of every month, essentially the credit card company will get the money on the fifth day of every month. Sooner than later, child’s credit card will look at this as “late-payment”. Eventually due to late payment(s) their credit history will start to take a hit.
4. Only Charge What You Can Pay Back
Credit cards are convenient and easy to use. They are also a tool that can become overwhelming pretty quickly. Teaching your kids the importance of only charging what they can afford to pay back. If they charge a $1,000 now, can they pay it back by the end of the month? If they can not, they should not charge that much.
5. Cash First, Credit Second
The main goal of every parent’s teaching about credit cards is to install a mindset that credit cards come second. Kids should learn the importance of paying with cash. If they have the money in their bank account, use it to pay for the purchase versus using their credit card.
Parents should teach their kids that credit cards come in good use as a back up in emergencies, and are most powerful when used as such. Using credit cards as a buy now – pay later tool, will only lead to trouble down the road.
6. Discipline is Key
Be honest about your kids organization and sense of discipline. Look at the small things; Are they organized in life? Do they follow your household rules? Are they on time for their curfew? If your kids are not punctual and don’t have life discipline, highly unlikely that they will be responsible with their credit card.
There are many people who don’t know how to use credit appropriately, all because they never developed the discipline through practice. Not all kids will be suited to using plastic.Not all adults should be using plastic.
I was a great example of an irresponsible adult with a credit card. I didn’t know how to mange my credit, didn’t take my credit cards seriously and I paid for it dearly. Your personal values will come into play when it comes to teaching kids about credit cards. Whether your family lives on cash or uses credit cards, talking with your children about the choices you’ve made and why is an essential step for a brighter future with credit for them tomorrow
Kids are like a sponge. What they see, is what they do. So, never forget that you’re kids are always watching and learning along the way. So, be mindful on how you use your credit cards.