Sunday, 23 June 2013

Introducing Credit to Children… Is it Wise?

Statistics on credit knowledge are dismal! According to a recent survey of 1022 American adults, a large percentage are in the dark about one of the most important aspects of consumer finances - credit scores. Over 25 percent of those surveyed did not know how to raise or maintain their credit scores. One important reason is that public education neglects to effectively teach the concept to kids. Even when they do address the issue, it’s generally from a book, which doesn’t compute as easily as a hands-on approach. So, yes the wise parent will take the initiative to teach the value of money and the importance of credit.

According to Executive Director Stephen Brobeck of Consumer Federation of America, who conducted the survey, “Credit scores have become so influential in the lives of most consumers that tens of millions of people are heavily affected by a lack of understanding their credit scores. Those with low scores, on average pay additional finance charges of $5000 or more when paying off a car and additional home mortgage cost in the tens of thousands. Low scores are also more likely to limit a consumers access to, and increase the cost of, services such as cell phone & electric services, and rental housing.”

With so much on the line, not only should the next generation of consumers learn the importance of credit but many adults should take a refresher course. Leaving it to chance that our children will experience the American dream is just a pipe dream without putting in the time to educate them on financial management while demonstrating that it’s only possible when debt is kept low and credit is used responsibly.

Make It Fun!

Educational instruction and hands-on practice go hand-in-hand to teach about credit. Start the lesson at the dinner table or take advantage of fun websites to learn financial literacy. A quick search of the Internet brings a number of interactive websites and games designed to teach the concept of credit and to demonstrate how to manage money for all ages.

Hip Pocket Change is an interactive site provided by the U.S. Mint for kids that includes puzzles, games, facts and trivia. Kids will enjoy the vibrant colored site that allows them to learn through cartoons and history bits that include the birth of a coin. Sense & Dollars has a fun game called Check It Out, that gives you a job and one month’s worth of income and one month’s worth of bills to manage; see how you do. For high school age and older, try Whatsmyscore.org with guides, games and information covering everything you need to know about credit.

Begin with Debit or Prepaid Cards

Moving from computer simulation to real life to learn about credit should begin slowly. Most young people are ready for the responsibility when they’re in high school; however, instead of a credit card, begin with a debit card that automatically deducts the funds to make payment directly from a bank account. Their weekly allowance or a paycheck from their first jobs can be used as the source of deposit funds. In this way, you can monitor their behavior while protecting against any real debt danger.

Another option is prepaid credit cards that work more like a checking account than a credit card, with funds being deposited in advance in an account specifically set up for that purpose. This type of card has the added benefit of being applied to their credit history. Load funds onto the card and begin teaching the skills required to manage an actual credit card. There will be no threat of spending over the limit and no bills to pay; once the funds are gone the card will be denied at the checkout. To make the experience closer to that of a credit card, have them pay the balance back each month and the fee the bank charges for the privilege of using the card.

Set Limits

Using credit is not an intuitive skill. No matter which type of card is chosen, parents should establish ground rules for using credit cards and set consequences for breaking those rules. The idea isn’t to restrict their actions but to set boundaries that can be followed for the rest of their lives. Learning how to handle a credit card is a key component to setting the stage for future credit.

  • Only use the card when cash isn’t available.

  • Record all transactions in a register to always show a correct balance.

  • Include any fees that might apply in the register.

  • Set limits on what can and can’t be purchased.

  • Teach safe credit practices. Take the receipt and never allow the card to be out of your sight.

  • Review the statements with your child to monitor spending habits and check for mistakes.


When your child grows to be more responsible it’s time to help them begin using an actual credit card. If they are under the age of 21, you will most likely be required to co-sign on the account, unless they can prove sufficient independent income 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 they learn.

The sole purpose of this exercise in teaching your kids about credit is to move them into an independent life and adulthood. Eventually you’ll need to step back and allow them to sink or swim. Failure to do so may result in overdependence on you as a source of financial stability. Your hard work in overseeing their efforts to learn will be rewarded with a financially responsible young adult who has all the tools to successfully make their way in this world. 

About The Author: Vanessa May is a regular contributor to www.wowcreditcards.com along with other financial blogs throughout the online community. She aims to educate consumers with the use government and other reputable sources to provide relevant news on money management, credit, debt, credit card application, debt services and a wide range of other finance related topics.

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 Introducing Credit to Children… Is it Wise?


 

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