What To Tell Your Children About Credit Cards

When children go away to college these days, they often carry two “essentials” that weren’t available to prior generations: personal computers and credit cards. According to Nellie Mae, the national student-loan financing corporation, 83 percent of undergraduate students have at least one credit card, and the average balance owed is $2,327.

What’s wrong with this picture? It suggests that young people are ringing up too much debt too fast. It also suggests they don’t fully understand the some basic concepts about money—not the least of which is that anything bought over time, at interest, ends up costing far more than it should. Impulse buying and overspending, before they are even out in the working world, leave many of today’s graduates with debt they can’t afford and a less than attractive credit rating.

So what’s the solution?

For children (as well as adults) the solution is not spending beyond your means and learning how to manage credit.

Online Shopping at an Early Age Let’s start with a few basic facts of modern life:

• Children ages 6-17 are collectively spending an estimated 5 billion hours per year on the Internet, and shopping is among their favorite online activities. 
  
• The vast majority of Internet purchases are made with credit or debit cards.
• From an early age, today’s children are making purchases (especially online) using their parents’ credit cards, often without realizing that the debt must eventually be paid off.

For parents, the challenge is helping their children understand the value of money and credit, regardless of its form. Here are some suggestions:

1. Require children to repay any card purchases in cash. Some parents ask for the money up front (before the charges are actually incurred), but another idea is to wait and show the child his or her items on the credit card statement. This allows children to see the actual cost of what they purchased—and the interest that will be added to the purchase if they don’t pay the amount in full.
2. If children can’t repay card purchases on time and interest accrues, add it to their bill. This helps them understand the cost of paying over time.
3. If they are unable to pay for their purchase in full, cut off their “credit” for future purchases until their entire balance is paid. This will help them understand that they can’t always buy what they want when they want it. (A lesson even adults should learn!)
4. Some banks offer credit cards to minors with very low credit limits (guaranteed by a parent or accompanying bank account). Some parents believe that teenagers take personal credit more seriously when cards are issued in their own names.
5. Debit cards and pre-paid phone or merchant cards can also help to educate children about credit. The pre-set limit on these cards prevents overspending.
6. Emphasize that credit is always personal and cards should not be shared or loaned.
7. It’s important for children to learn that access to credit is an earned privilege, not a right. Parents can reinforce this by cutting off credit when children use it unwisely.
8. Model good behavior. Avoid impulsive card spending in front of children, and don’t carry more cards than you need or a higher balance than you can afford to pay off. 

In the modern world, it’s realistic to think that when your child goes away to college, he or she may have at least one credit or debit card. The goal of educating children about credit is to send them off confident that they won’t owe “an arm and a leg” soon after.

This information is for general educational purposes only and should not be considered specific financial, tax or legal advice.  Always consult with a qualified advisor regarding your individual circumstances.

Content prepared by:
© 2011 The Penn Mutual Life Insurance Company, Philadelphia, PA 19172