August 5th, 2013
Introducing Credit to Children… Is it Wise?
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**Today’s guest post is contributed by Jeremy.**
‘Buy now; figure it out later’ is the motto of many Americans and the reason so many people are struggling financially. Parents can attest to the frustration of grown children who fail to responsibly manage their finances. In fact, college graduates owe on average $35,200 in college debt, according to a Fidelity survey. The bulk of this debt is from federal, private and personal loans, in addition to an average of $3,000 in credit card debt. Unfortunately, many graduates start their new life after college with an entry level job that barely covers the loan payments. Once the reality of the situation sets in, it’s too late and many wish they would have learned how to manage their finances early, before they went to college.
Even if credit is a subject discussed in high school, it’s most effectively taught by hands-on experience when there’s no fear of doing permanent damage. A wise parent will take the initiative to teach their children about the value of money and the importance of credit while they’re still young. The goal is to express to children how valuable credit is to their future and to help them start building strong financial skills prior to leaving for college.
Establishing Healthy Habits
Much of our behavior as adults starts when we’re young. The first and most important financial lesson for children to learn is how to create healthy spending habits.
1. Knowing the Difference between Needs and Wants
Debt problems typically start off slow – one irrational purchase at a time. That’s why it’s so important to teach our kids the difference between the things they want and the things they need. The lesson isn’t to stifle all of their wants and desires, but to put things into perspective so that their needs are a priority and their wants become secondary.
2. Managing the Impulse to Spend
The desire to make impulse purchases never goes away, and dealing with temptation is especially tough for children. Teaching kids how to control their impulses will be especially valuable when they become adults. Teaching your children to avoid the temptation by staying out of the candy aisle is a good start, but a better plan is to teach them how to create a budget and wisely managing money.
Making it Fun for Kids!
Learning about finance doesn’t have to be boring. By using visual and hands-on tools when teaching the concepts of money, lessons can be fun and engaging. Incorporate the ideas into everyday activities. Make grocery shopping an adventure by using a budget (grocery list) and challenge your child to buy everything on the list with a specific amount of money. Point out the difference between wise and poor choices.
Take advantage of free teaching resources online. A variety of interactive websites are available to teach the concepts of credit and money management to children. Search the Internet and you’ll find websites for all ages and financial literacy:
- Practical Money Skills for life begin early. PracticalMoneySkills.com offers a quick start to early learning for small children with games and lessons for all ages.
- Kids Math Games Online is designed for early learning. The site offers fun money games and activities related to counting, coins, spending and more. Open a lemonade stand, start a coffee shop, count coins, run a farm and enjoy all kinds of fun online games that will help your kids learn about money.
Introduce Credit Slowly
Once you’re confident that your child understands the concept of credit, it’s time to move from computer games to an actual credit account. The majority of young people are ready for the responsibility when they’re in their final years of high school. Instead of rushing to get them an unsecured credit card, begin with a prepaid credit card instead. A cross between a standard credit card and a checking account, they will be ‘borrowing’ their own money deposited in advance.
A prepaid credit card is a great tool to teach the necessary skills required to manage a traditional credit card, with these additional benefits:
- Adds no actual debt
- No bills to pay
- No risk of penalties for spending over the limit or missing a payment
After the basics of managing plastic are understood, you may be ready to move your child to a traditional credit card. For those that are under the age of 21, a cosigner will be required unless sufficient income is available to handle the payment. If you agree to co-sign, you’ll be able to oversee the actions of the account and provide additional support as needed. Your options will be limited, but try to choose a card with a low APR and a small credit limit. Be diligent about overseeing the account to prevent the balance from becoming too large. Prepare a list of ground rules that aren’t too restrictive and reasonable consequences for noncompliance.
- Follow limits on when and what the credit card can be used for
- Promise to keep a register of expenses/fees, payments and balance
- Agree to review monthly statements together
- Use safe credit card practices
The Financial Finish Line
Credit problems can follow your child for years into adulthood, increasing the cost of borrowing and complicating their future financial needs, including auto loans, mortgages and more. With so much on the line, not only should the next generation of consumers learn how to use credit responsibly, some of today’s adults could use a refresher course, as well. A ‘live and learn’ mentality is no way for children to enter their adult years, we owe it to them to put in the time to educate and teach them about the importance of good credit and how to avoid problems with debt.
President and founder of www.wowcreditcards.com, Jeremy Panizzoli has been educating consumers about building and maintaining strong credit for the last 10 years. A regular contributor to a variety of financial blogs and websites, he specializes in credit and debt-related issues and is an expert on credit cards and the credit card industry.
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