It is all too easy to slide into credit card debt. This can easily affect your credit history, which could make it difficult to buy a car or a home, or even to get a job.
Prospective employers check credit. In my fifth and final lesson about educating children about money, we focus on how to properly manage credit card debt.
Genetics are important.
A mother’s eyes or a father’s big feet are among the countless traits parents pass to their children. The same can be said about creating and managing debt.
Talking to your child about credit cards is as critical as teaching them to drive, instilling good work ethic, and teaching them about drugs and alcohol. No matter what your stance is on credit cards – whether you believe they’re good or bad – it’s your job to teach your children about credit cards before the credit card issuers send them one in the mail.
Many young adults are excited at the prospect of getting a credit card, but often for the wrong reasons. It is important to combat their misconceptions early so they become smart credit card users when the time comes.
Credit cards can be a great tool when they’re used correctly. However, they can destroy your financial life, making other aspects of life much more difficult.
Start with you
Most money lessons are not fun and easy, but credit card debt is an even more difficult conversation. This is especially if you’re struggling to manage your own.
When you’re in the process of getting out of such debt, you should be upfront with your kids. They most likely know something is upsetting you. I suggest you focus on the changes you’re making and how they can support you, rather than going into a detailed explanation of what debt is at this time.
“Mom and Dad bought more than we should have with our credit cards, which was our mistake. The good news is we’re fixing it, and we need your help.”
Subsequent conversations should focus on working together to find ways to save money and on starting good money habits by setting family goals.
Aren’t credit cards kind of a boring topic for kids?
Not at all. You’re teaching them about money, and your child is interested in money for the same reasons you are. Money is great because you use it buy “stuff”. Tell your child you’re going to teach them how to buy goods and services and pay for them. It really is that simple. Credit cards are only boring when you frame them that way. Don’t start the conversation with, “Now we’re going to talk about important adult things because it’s good for you.” That’ll put anyone to sleep.
Credit costs money
You and I know that credit isn’t free, but children need to understand that borrowing money is not like borrowing a classmate’s pen — unless that classmate charges a fee for lending out pens. Teenagers need a different spin on this lesson. They may know intellectually that credit costs money, but the allure of a shiny card is strong. I’ve found a quick way to cool off a credit-dazzled teen: Have him or her read a card application’s fine print out loud to you — especially the sections about interest rates, late fees, and rate hikes. Now it’s not just you that’s saying that credit costs money. They’re getting it straight from the credit card issuer and hearing it in their own voice.
Real-life practice: Give your kid a loan
Whenever you hear, “Please! I swear I’ll pay you back!” you have an opening for a learning experience.
It’s one thing to talk about debt. It’s another to experience the feelings that come with paying month after month on a purchase. If you feel your kids are ready and their request is worthwhile, offer to spot them a loan — with an interest rate, payment terms, and a penalty clause if they miss a payment.
Show them how much the loan will cost compared to the cash price. Put the payment schedule on your calendar so you don’t accidentally teach your kids that repayment is optional. And lend only as much as they need.
Lending your kids money is not without risks.
They may decide to go on a chore strike or be stricken with borrower’s remorse.
You may even have to temporarily repossess a computer, video game, or other item. But they’ll be smarter consumers and better money managers because of the experience, and they’ll see debt as a tool to be used carefully and not just as a four-letter word.
Debit vs. Credit Card
The most crucial lesson children and teenagers need to know about using a debit card is that it is attached directly to your bank account and the funds you have available at that time.
They need to know using a debit card means that the money will instantly be deducted from their cheque account. Teens need to know how much they have in their bank account before they shop. It requires them to know how to maintain and balance a cheque account.
They should also learn how to monitor their accounts online. They should understand that if they use the card at an ATM to get cash, but they cannot get more cash out than they have available in the bank.
The most important lesson children need to know about the difference between credit and debit cards is that instead of the money coming directly from your account as it does with a debit purchase, credit purchases come with a bill at the end of the month. Young adults must understand that a credit card is not a golden ticket to just shop and buy anything they want. They must realize that it is a temporary loan.
Unfortunately, the personal finance lessons you teach may go in one ear and out the other.
For older kids, practice is the best lesson. Get them accustomed to using credit while they’re still under your roof. You can monitor their credit use first-hand and help modify bad habits.
Add your kid to your credit card as an authorised user. He or she will receive a credit card in their name, but you remain the primary accountholder. Give them a small monthly spending limit as you would with a prepaid debit card. If you like, make them responsible for their own monthly charges. This approach is slightly dangerous, and you’ll need to stay on top of their charges and make them accountable for their actions. If all goes well, your kid will not only receive hands-on credit card experience, but also establish a credit history.
Mduduzi Luthuli is an investment banker and CEO of Luthuli Capital.