Talking to your child about credit cards is critical in building a good financial foundation. Children should understand how credit cards work and how to use it correctly to avoid future problems. Here are five lessons that you must teach them to set them up for success.
- It is not free money.
Most kids think the credit cards of their parents work just like magic. Scratch it and you get whatever you want. It is important to teach them that using a credit card means spending someone else’s money that must be repaid at the soonest; otherwise it will cost more.
- It is not good to rely on a credit card.
Explain to your children that as much as possible, they must use the money from their checking account, which represents money that they have already earned. It should be their primary way to pay for purchases. It is also critical to teach them the merits of delayed gratification and savings.
- It has limits.
Credit card issuers impose a credit limit, a number that amounts to the maximum balance a cardholder can hold. Warn your kids about the dangers of collecting big balances, which will stretch their credit card and keep them from being able to use it when something important suddenly comes up. Being financially responsible means always keeping a low credit card balance; ideally, below 30% of the credit limit.
- It is not okay to miss payments.
Early on, your children must learn that creditors are not patient people. Credit issuers will not knock on their door, of course, but they will call, send letters, and even sue for unpaid credit card balances. Worse, credit card companies report late payments to the credit bureaus, which hurt your credit score and ability to get credit in the future.
- It is your responsibility.
Warn your kids about peer pressure and marketing manipulation. Make sure they understand that ther buying decisions must be guided by their own critical thinking and not some advertisement out there. Teach them how to make sound financial decisions and how to protect themselves against the influence of others over their choices. Ultimately, it is a must that they realize, they are responsible for their bills, not their friends and advertisers.