Make sure you’re setting the right example every time you pay with plastic
Personal Finance Writer
Freelance writer based in New Rochelle, N.Y.
As we all know, we aren’t born knowing how to use credit cards responsibly. It’s something that needs to be taught – starting at a young age. Unfortunately, parents unwittingly tend to do things just about guaranteed to show kids exactly the wrong kind of behavior.
“Once you get into bad habits when you’re young, it just becomes the way you continue to operate,” says Mark Billion, a bankruptcy lawyer in Wilmington, Delaware. Consider this: The average credit card balance for those born in the mid-90s or later, known as Generation Z, is $1,682, according to Experian, which is pretty high for people barely out of college, or still in it.
But in today’s world, where a growing number of people rarely use cash, knowing the do’s, as well as the don’ts, of how to teach your kids about credit cards is critical. Here’s a look at how not to teach your children about responsible credit card use, along with the preferable alternative.
Using plastic as a frequent payment tool without explanation
A major wrong move is to charge up a storm in front of your kids without explaining to them how a credit card works. “A lot of people take out their card and, willy-nilly, just use it,” says Neale Godfrey, president and CEO of Green$treet Ventures and a leading expert on the topic of kids and money.
Kids are always watching their parents, whether mom and dad realize it or not. And they tend to model their behavior according to what they see. For that reason, it’s important to be aware of how you use credit cards and ensure you’re sending the right message by being deliberate in your purchases. By doing so, your children learn that credit cards are not a route to buying whatever they want whenever they want it.
“You need to teach kids that a credit card is not a magic piece of plastic that permits you to buy anything,” says Godfrey.
You can underscore that lesson by discussing how credit cards work – and starting those lessons well before your children are old enough to have a credit card of their own. “Explain that the bank will lend you the money for a short period of time, but you have to pay it back,” says Godfrey.
How to make that lesson real? Starting as young as age 7 or 8, when you’re about to swipe your credit card at your grocery store’s checkout counter, talk to them about what’s happening, suggests Sean Fox, co-president of Freedom Debt Relief. Let them do the swiping to increase their involvement. Then make sure to get a receipt. When you receive your credit card billing statement, go over it with your children with that piece of paper (or emailed document) in hand.
“Explain that the bank will lend you the money for a short period of time, but you have to pay it back.”
“You tell them, remember when we bought all those groceries at the supermarket, this is the charge from those things we bought,” he says. With a child of around 10 or 11, take the opportunity to discuss interest and how that affects how much you owe. Also, refer to the section on the statement that shows the amount you’d have to pay if you only make minimum payments. And don’t do it once. Periodically, go over your statements with them.
If you’re not paying your card off in full, it’s especially important to discuss the matter of interest. And if possible, in simple terms explain as best you can how you plan to pay off the balance.
It’s all about delayed gratification. “If you want them to be thoughtful consumers, you need to demonstrate that yourself,” says Dr. Brad Klontz, associate professor of financial psychology at Creighton University’s Heider College of Business in Lihue, Hawaii.
If you’re mulling over the purchase of an expensive item, talk about whether it’s too costly or how you plan to save up for it. To give them hands-on experience with saving, spending and delayed gratification, start giving them an allowance, and designate a portion for saving, another for spending and a third for charity, beginning when they’re as young as 6 or so.
See related: 5 lesssons to teach kids how interest works
Giving your kid unsupervised charging privileges
Don’t hand over your credit card to your teenager. First and foremost, it’s technically against the card issuer’s policy to allow others to use your card. But even with an authorized user card in their name that’s connected to your account, charging rules must be established. Most adolescents make at least some buying decisions on their own, perhaps using funds from their allowance, gifts or an after-school job, or paying with their parents’ money.
See related: The do’s and don’ts of giving your child their first credit card
Teenagers still have a lot to learn about money – savings, spending, pretty much everything. One option is to get their feet wet by opening a checking or savings account that comes with a debit card. “I look on it as a credit card with training wheels,” says Godfrey. “You ease them into credit.”
One option is Greenlight, a website that lets parents control their kids’ debit card use. How it works: You put money in a special account with a debit card attached. Then, to buy something, the teenager has to send you a picture of the desired item and wait for you to release the money before making the purchase.
“Once you get into bad habits when you’re young, it just becomes the way you continue to operate.”
If your teenager is in a defiant phase, Klontz suggests turning that rebelliousness to your advantage. “Developmentally, adolescents push against what adults are doing,” he says. With that in mind, talk to them about the ways marketers persuade consumers to buy their goods and services, and how credit cards can enable such behavior. “That empowers them to say, no way, I’m not falling for that,” he says.
Of course, it all depends on the individual. Some teenagers are more responsible than others.
“You have to know your child,” says Jill Emanuel, a financial coach in Mesa, Arizona. If you think your teen is up to it, you can add him as an authorized user on your credit card, but with strict rules attached – say, $50 a month in charges – perhaps in lieu of an allowance. Then you’d go through the bills monthly together. And if you find your child is going over the spending limit, you can take away the card.
Sending a kid off to college with a card without a serious conversation
Some parents figure that once their progeny is old enough for college, they’re ready for plastic. And there are a few routes to take, all with significant downsides. One is a student credit card, which students under 21 can get if they have a steady source of income. However, know that your child’s first card typically will come with a very low credit limit, which can be a blessing, but may not be enough to cover the cost of an emergency car repair or hospital bill.
Or you may decide to add your college kid as an authorized user to your card account and take care of the payment yourself. Doing so when they’re away at school and, thus, unsupervised, however, can be especially tricky.
“They have no accountability for their behavior,” says Klontz. “And you’re 100 percent responsible.” Your credit card company won’t care that your son took six of his friends skiing to Aspen without your knowledge. It just wants to be paid.
Don’t take it for granted that just because kids are in college they’re ready to handle a credit card responsibly. That’s especially true if you haven’t been conscientious while they were growing up about discussing financial matters.
If your child is 18 with proof of regular income or age 21, one possibility is to help him apply for a secured credit card – and assumes responsibility for paying the bill. These cards require a security deposit – it’s refundable once the account is closed – that also often serves as the spending limit. Not only does such a card prevent your kid from charging up a storm, but it helps to start building a credit history, since payments are reported to credit agencies.
Another possibility is to get them a prepaid credit card, loading it up with an amount of money you determine you want them to have. The balance will be reduced every time your child makes a purchase and you can reload it periodically as needed. Or you can go the debit card route. No matter what, “Keep them on a short leash,” says Godfrey. If there’s an emergency, you can always transfer money to their checking account in a hurry.
As with teenagers, however, there are few hard and fast rules. If your student is the responsible type, you can still try out an authorized user credit card, always setting ground rules about who pays for what. Perhaps you take care of trips home, while your child pays for takeout. Of course, you’ll pay the bill and your child will need to repay you.
Take Cece Morell, a Pelham, New York, mother of two. When her daughter Kate started college two years ago, she added Kate to her credit card, with the understanding it would only be used for emergencies. Her husband reviews the bill every month and then asks for the appropriate reimbursement. For her part, Kate created a spreadsheet with which she tracks how much money she has in the bank, plus her credit card use.
Also, if you let your children get a credit card, either by adding them as an authorized user or if they are 18 and have their own regular income, make sure to explain the facts of life about credit scores and the ways in which a bad score can hurt their future.
“You wouldn’t give your child a car without making sure they know how to drive,” says Klontz. “That’s the equivalent of handing them a credit card without any instruction first.”
See related: Sending kids off to college with rewards credit cards
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