There is no such thing as too early when educating your children about financial management. It is better to teach them about debt, debt relief and personal finance at an early age so they get used to the right habits and skills that will keep them financially stable.
Part of your child’s financial education should always involve credit cards. A lot of us got into so much trouble with our cards because we never realized how fast it can accumulate and how much money we will be wasting on interest. But now that you know and you are intent on keeping your children away from making the same mistake, you need to teach them a couple of truths about credit cards and their use.
Most of the time, children get excited at the prospect of getting their own cards. But before you hand it to them, here are the lessons that you have to instill in them.
First of all, ask them about their perception of credit cards – what good does it do? If they answer that it allows them to purchase things without cash – they are correct. However, you need to stress out that even if that is possible, it should not be abused.
Tell them that what you are spending initially is not your money – but that of the credit card company. You need to pay them back as soon as the billing statement comes in. If they cannot afford to pay it off when the bill comes, they should think twice before making the purchase. That is probably the most important lesson to teach.
You should also teach them how interest rates work. The longer it takes for them to completely pay off a card purchase, the more it will cost in terms of interest. It is very important that they understand what happens when they fail to pay their card dues every month. It is a business after all and tell them that when it comes to money, businesses usually do not like waiting for payments. Let your child know how late payments affect credit scores, future opportunities and the overall financial state of their future selves.
Another lesson that has to be imparted is never to rely on credit cards alone. Making cash purchases is still ideal because it is easier to stay within the budget. Introduce the concept of debit cards and how they differ from credit cards. Even if you use both, your child would not have made the distinction and could have made the assumption that you use credit cards for all your purchases.
You should also teach your child about their credit limit. This is the maximum amount that can be charged by the holder. Let them know that reaching this limit is never a good thing. Tell your kids that the ideal balance on any card should only be 30% of the credit limit. Show them how to compute this amount.
Lastly, teach you child smart spending habits. Tell them that even if their friends or that man on TV tells them to buy something, it does not mean that they should.
You can decide the age that you feel your kid is ready to hold their own card. Arrange it so that they understand that the payments for the card will come from their allowance. Monitor their expenses the first few months and guide them as they adjust to it. Expect that they will splurge but be adamant that you will get the payments from their allowance. Set up a system that will work best in terms of teaching your child about financial responsibility.