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Teach Kids About Buying on Credit

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Keeping Out of Credit Card Trouble

It's so easy to whip out the plastic to pay for something that looks appealing on the store mannequin. However, such impulse buying and other irresponsible uses of credit cards can get a person into serious trouble. The first decision should be whether the item is needed. As with that slice of chocolate cake, if a person waits a few minutes before taking it he may decide to forgo the extra calories.

Once your child decides that she needs an item, the best policy to follow is never to charge any amount she knows she doesn't already have the cash to pay for. In this way, when the charge bill arrives, she simply pays off what she has bought (the balance) all at once.

Piggybank on It

If the charge bill is paid in full each month, this allows the holder to enjoy the use of his money for a longer period of time. This grace period gives him a float because he can keep his money sitting in an interest-bearing account from the time he buys the item until he pays the charge bill, earning interest that he would not have earned had he paid cash for the item. However, some cards may initiate an annual fee for holders who always pay in full.

Money ABCs

A minimum payment is the least amount that can be paid on a credit card bill without being in default. The minimum amount may be a percentage of the balance or, if the balance is low, a fixed amount.

Sometimes your child may not have the cash on hand but might anticipate that she'll have the money by the time the charge bill is due (for instance, she's expecting a pay check). Sometimes she needs to buy something that costs more than she'll have the money to pay for all at once (such as a computer). Here's where it's easy for the unwary to get into deep financial trouble.

Before charging anything that your child doesn't already have the money on hand to pay for, make sure that she has a plan to pay off the debt. It may take her months or even a year or more to do it, but she needs to take control so that her debt doesn't control her. In the meantime, put the card away where she won't be tempted to use it until the debt is paid off.

Don't just pay the minimum payment listed on the bill, either: It will take her a very long time to get out of debt by doing this (although it will keep her eligible to continue charging up more debt).

If your child is finding it hard to make more than the minimum payments and keeps charging up new debt, it may be time for help. Your child obviously didn't get all the information on debt that she should have, so review it with her. Check out Web sites that provide consumer information on debt, such as the National Institute for Consumer Education.

Before she gets into trouble, advise that she only get one credit card so that she can't buy more than that single credit limit. But if she gets into credit card trouble, make sure that she knows she can turn to you for guidance—and perhaps financial assistance. You can then steer her in the direction of a debt counselor, who can help her work out a repayment plan. Or, you might be in a position to lend her money to pay off her high-interest loan to the credit card company—provided that she then pays off her loan to you. Making loans to your child is discussed in Advancing Money to Your Child, and Loaning Money to Your Child.

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Excerpted from The Complete Idiot's Guide to Money-Smart Kids © 1999 by Barbara Weltman. All rights reserved including the right of reproduction in whole or in part in any form. Used by arrangement with Alpha Books, a member of Penguin Group (USA) Inc.

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