Teaching Children about Credit
by Tom Price
The drama plays out around the country every year: The new college student is invited to register for a credit card as well as for classes. Sometime afterward, short on cash but long on desire to join his classmates on the town, he uses the card to buy a pizza. Later he charges clothing, then expenses for a holiday trip. One day he informs his parents that he's charged to the card's limit and can't make the monthly payments.
Expert advice When the parents call the experts for help, "Our advice is to make that child work it off himself," said Nancy Bolitho, education coordinator of the Consumer Credit Counseling Service of Austin, Texas. "If the parents bail them out, the kids will have no qualms about doing it again and the cycle will repeat. The kid who has to pay it off learns a lot in the process."
It's better, of course, to learn before he gets in so deep. According to Bolitho and other experts, the time to start is when the child is young. "If they have a grasp of fiscal responsibility going out the door," said Janet Bodnar, the kids-and-money expert at the Kiplinger financial publishing house, "the chances are less that they'll go nuts when they get their first credit card."
Credit risk A key is teaching the child to resist peer pressure, according to the National Foundation for Consumer Credit. College students often abuse their credit cards while trying to impress their friends.
Explain how easy it is to get into debt and the consequences of not repaying charges before interest accrues. At the average credit card rate of 18 percent, for instance, a student making only the typical minimum required payment would spend eight years retiring a $1,000 debt and would pay $1,000 interest in the process! Your child should have a repayment plan for anything he charges.
Make sure your child understands that credit bureaus compile records that affect borrowers throughout their lives. Missed payments can restrict his ability to rent an apartment, obtain a home mortgage, or even qualify for certain jobs.
Emphasize the importance of never lending a card to others, never leaving it where others could find it, and revealing the number only when making purchases from reputable organizations.
Credit with training wheels A debit card tied to a bank account can help a child learn to use a credit card wisely, Bodnar said. The child uses it like a credit card and must keep track of his purchases. But he can't spend more than he's deposited. A child also can practice using credit by borrowing from a parent. If you do that, Bolitho advises, treat it like a commercial loan with a signed agreement, payoff schedule and interest.
Knowing your child is likely to receive credit card solicitations when he turns 18, you can offer to help him choose the best. Compare annual fees and interest rates, and request the minimum credit limit that you think he needs and can manage.
