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Many parents aren’t interested in teaching their children about credit cards and what those cards mean to a credit score. However, the problem with that approach is that, at some point, your child is probably going to have a credit card and will need to take control of his or her finances. If your child hasn’t had good lessons in how to use credit responsibly, it can become a real problem.
Even though my son is only 10 years old, we’ve already started talking about credit cards and how they work. He sees me use them, and I talk about how we pay off what we spent on them at the end of the month. When your child is old enough to understand the basics of personal finance and money management, it’s a good idea to talk about credit cards and to share some valuable lessons. Here are three of them:
1. Credit is a loan.
The first—and most important—lesson to learn about credit cards is that credit isn’t money that is your child’s to spend. Money from a credit card is a loan. Instead of using your own money, you are borrowing money from someone else.
Children need to understand this concept early on. Even if you pay off your credit cards in full at the end of the month, talk to your children about how you are using someone else’s money and how you are paying the money back.
If you carry a balance, show your child your credit card statement and show that you have to pay interest on the money because it’s a loan. It’s vital that children understand that a credit card doesn’t show how much money someone has—it shows how much someone can borrow.
2. Credit cards should only be used in conjunction with a spending plan.
Make it clear that if credit cards are used, they should only be used in conjunction with a responsible spending plan. If you want to get the rewards from using a credit card, you need to make sure that you aren’t spending more than you can afford to repay—preferably before you are charged interest.
If you don’t already have a spending plan in place, involve your kids in creating one. Show your child that you use your credit card only for purchases that you have planned, like groceries, utilities, and big-ticket items for which you have already saved. Show your kids that credit cards can be tools used to earn rewards, but this will only work if the spending is already planned out and the money to repay the loan is already available. Point out that carrying a balance results in interest charges that may amount to more than the rewards earned.
3. It’s OK to not have a credit card.
While credit cards can be valuable when it comes to building a good credit score, there are many people who get along fine without them. Let your child know that using a credit card is a choice, and if he or she doesn’t want to use a credit card, that’s just fine. One of the most important financial lessons that children can learn is that they don’t have to be like everyone else—as long as they are always financially responsible.
Teach your child to know him or herself. Maybe your child isn’t ready for a credit card at age 18, but after landing a job and learning some money management savvy, he or she will be ready for one at age 20. Don’t push your child into something that he or she may not want right now.
In the end, the best thing you can do is start teaching your children about good money habits when they are young. Teach the value of saving, investing, smart spending, and avoiding debt. And don’t forget to touch on your mistakes and the lessons you then learned. That way, if your child does decide to get a credit card at some point, he or she is much less likely to make big mistakes with it.
Miranda Marquit is a freelance writer and professional blogger specializing in personal finance, family finance and business topics. She writes for several online and offline publications. Miranda is the co-author of Community 101: How to Grow an Online Community, and the writer behind PlantingMoneySeeds.com.
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