As a parent, your child’s first credit card is a pretty scary thing, and not just because you’re potentially cosigning on the account. Kids can receive a lot of mixed messages about credit and how to use it and it’s important to make sure that the first credit card advice they receive is crystal clear.
Here are the five key messages that should be included in the first credit card advice that you pass along to your kids:
Don’t buy things you can’t afford
It sounds obvious, but when it comes to kids and credit cards, always err on the side of too much information. It isn’t unheard of for a child to somehow get the idea that credit cards represent “free money”. The very first credit card advice that your kids should know is that every single cent that they charge to their card will need to be paid back. Prior to getting their first credit card, kids should have learned the value of a dollar and be capable of making value judgments. If they haven’t mastered those skills, you may want to delay the introduction of credit cards.
Pay attention to the numbers
Many of us have had to learn the hard way about the fine print on credit card agreements.
Some cards carry annual fees, and then there are late fees in the neighborhood of $25-35, and interest rates that can soar as high as 29%.
The interest rate may seem straightforward, but the way it’s applied to balances is anything but. Explain to your kids how these charges work, particularly the way that banks charge interest on a daily basis instead of a monthly basis, allowing them to maximize their “take” (they can then charge interest on the interest due).
Pay on time and, ideally, in full
Credit cards can be a terrific financial tool if you make purchases that you can afford to pay off each month. Late payment fees can be a killer, particularly when you’re just a kid. Consider the case where a kid charges $100 in a month and forgets to make the payment. The late fee is applied, plus the finance charge and after a month or two the balance due has increased by 50%. For a kid, that is money that they may not be able to come up with, and the debt can snowball from there. It’s a slippery slope!
Mistakes happen
Make sure you teach your kid to go over each credit card statement carefully to make sure all charges are legitimate. Mistakes happen, and the responsibility lies with the card holder to identify and report those errors.
Credit card fraud and Identity theft are real threats
Unfortunately, data breaches and identity theft have become frequent occurrences in our society. And opening a credit card does come with an increase in those risks. Find a sample credit report and go through it with your child so they understand how to interpret the report. Have your child put a reminder on his or her calendar to pull and review his or her credit report on an annual basis.
You may not be able to control what your kids do with their credit cards, but it’s your responsibility as a parent to arm them with the knowledge that will help them make the best decisions possible.