Teaching kids about credit

For years I’ve been saying that we’re no damn good at handling credit. In response I’ve heard a lot of whining about nobody having taught us about money. If you don’t want your kids to make the same mistakes you did, isn’t it time to help them see how credit can be used as a tool instead of as a debt-trap. Hey, it’s only a matter of time until someone comes and waves a credit card under their noses and says, “Try it, you’ll like it.”

Can you imagine walking into a bank and saying, “Excuse me, but I don’t have a job, and I’ve never had credit, may I have a credit card please?” They’d laugh you out of the bank. Yet every year thousands of credit cards are given to unsuspecting students who have no visible means of repayment and don’t understand the impact of failing Credit Management 101.

Want to change that for your children?

As early as age 10, start teaching your children how credit works, when to use it and how to spend only what they can afford.

First, issue your child a credit card on the Bank of Mom & Dad. Have her design the card, draw up a cardholder’s agreement that you both sign and you’re off to the races.

In the cardholder’s agreement lay down the rules: how much credit she can use (the “credit limit”), when her statement will arrive, how much time she has to pay (that’s called the “grace period”) and the minimum payment required. Most importantly, describe with examples how much interest your child will have to pay on her balance.

Since the point of the exercise is to help your kids to learn the reality of credit use, they have to learn that when you use someone else’s money to buy stuff, that stuff costs more. So you’ve got to charge your kids 28% a year or more–like a store card—to get the message across, otherwise the interest is not painful enough for them to learn the lesson.

Now Baby Doll can use her credit card when she sees something she wants to buy but doesn’t have any money in his pocket. She gives you his card. You make the purchase on her behalf. You give her a charge slip to sign (a receipt book will do nicely for this). And you return her card and charge slip.

At billing time, you total her charges and present her with a bill that shows the minimum payment and the total outstanding balance. In a perfect world she pays you back in full. More likely, she makes a partial payment and carries a balance and you’re in the business of calculating interest (Now no one said parenthood was easy! But you might learn a lesson or two here yourself.)

If Baby Doll charges more than she can repay, or if she does not make her payments on time, you decline to accept future charges, repossess the items purchased until they are paid for and, if necessary, garnishee her allowance to repay the credit. Suggest she keep a notebook where she records how much she’s spent so she can anticipate her bill and know when to stop shopping.

It’s far better for your kids to experiment with credit under your careful guidance so that by the time they head off to a life on their own they’ll have mastered their own possibilities.