Teaching Your Children about Credit Cards

Teaching your kids about money is important. It may start with a few dollars in allowance for a couple of household chores. Over time, the allowance and responsibilities will grow. You might give them tougher jobs and expect them to do them on their own in order to earn their money.

Eventually, however, things will move beyond them having just a few dollars. The real financial world is not just about cash in hand, but also concerns the world of credit. Many parents don’t think that their kids need to know about credit cards, yet. But, let's take a closer look at that notion. If you're like the average person, you typically make a number of purchases with credit cards. Your child sees you regularly pulling out and plunking down that piece of plastic to 'magically' buy things. It gets through to them that credit cards are a method of paying for things. It's therefore your duty to make sure that they understand how to use them wisely and the responsibility that goes along with their use. While this is not to say that you should get your five-year-old his or her own Master- or Visa card, surely when your child reaches the teen years you should begin teaching about the obligations that are a part of this form of payment.

Before your kids ever leaves home, help them open both a bank account and a credit card account. Be sure the card has a low credit limit, however (many starter cards can be set with limits of $200 or so). Then explain to them that they are responsible not only for the charges made on the card but for the payment of those charges as well. Another option is to give them a cash card. These cards can be 'pre-loaded' with a set amount of money; when the balance is gone the card cannot be used anymore until more funds are deposited to it. Then, instead of bailing your child out every time he or she needs a little money for gas, movies or other 'life-or-death' necessities, point to their card and remind them that they're the one who must make sure they have enough of a balance to afford the things they want and need.

For many kids, getting a first credit card is a lot like riding a bike. Of course, they're going to fall and get scratched a few times. Lots of young people get overly excited about having a credit card and quickly mess up the new spending opportunity. They're going to grab that great pair of $100 shoes they saw at the store and the $50 DVD set of their favorite TV show, gleefully charging them both. The next week they're going to want to go to the movies, only to find that their card's limit has been reached. And, yes, their next move will be to come to you to rescue them.

We've all heard of the phrase 'tough love.' This is where you'll have to use it by telling them that if there isn't enough money available on their card, they're just going to have to figure out a way to earn the money to pay it down before they can use it again. There may be a lot of crying, whining and other normal kids' ploys (some adults, too, for that matter), but by not bailing them out you'll be teaching a very important lesson about fiscal responsibility.

It's also important to help your child understand how their card became maxed out. Many kids ignore those little incidental costs like the trips to the coffee shop and fast food establishments. Show them how quickly those expenses can add up. Look over the credit card statement with them. Pull out a calculator and add up all those incidentals that they didn't think were a big deal. This is where you can drive home the point that $2.50 for a burger every day adds up to more than $70 by the end of the month. It'll be an eye-opener to them.

You should also use this time to teach your child about monthly bills. Have your child try his or her best to pay off the credit card in full every month. This is a great habit to develop. With a low credit limit, it's even more important because if the card is not paid off (or at least paid down substantially), they'll have less spending power for the next month. Also, take the opportunity to explain the concept of interest to your child. The best way to do this is to let them know that if they don't pay off the balance each month, they're going to lose even more money to the credit card company. And, while you're at it, tell them what a credit report is. While at the moment they may not care about whether or not they have negative credit, you should explain it to them in a way that lets them know they won't like the consequences of credit irresponsibility, such as not being able to buy a car when they're ready to.

Another important message to teach your teen is about the threat of credit card- and identity theft. They should never let their friends use their credit cards, even very good friends. Make them understand what might happen if someone got hold of their card or personal information and the damage that could ensue, including the possibility of them being held financially responsible for the charges on their card.

Along the same line, let your child know that if they lose the card it shouldn't be kept quiet. Oftentimes, kids get scared and don't want to get into trouble, so they won't talk about the card having been lost. But reassure them, and stress the importance of notifying the credit card company and reporting the card lost as soon as they realize it's missing.

While many parents think kids and credit cards don't mix very well, they must be taught the proper use and respect of this spending option. It's better that they learn about it early from you – when they can be taught the right way – than letting them try to figure it out on their own after ending up in a credit nightmare that could take years to fix.