Tag: children & credit cards

Teaching Children About Credit: Step Two

Posted on June 23, 2011 by - CREDIT BLOG

Last week, I told you Step One of my plan for teaching children about credit.

This week, we’ll talk about the next step.

Allow your children to make pre-approved and controlled purchases using the authorized user account you established for them during Step One.

By giving your children access to the physical credit card and allowing them to make purchases, and then insisting they pay their bill at month’s end, you will go a long way toward teaching children about credit.
And if they make mistakes, push their budgets, and cannot pay their bills, even better! Let me explain.
I’ll start by putting into perspective exactly how this step works. Depending on your family’s finances and level of comfort, you can allow your child to make as large or as small of a purchase as you want, so long as:

1) The purchase does not push your utilization rate over 30 percent; and

2) You can pay the amount in full if your child is unable to do so by month’s end.

The important thing is that you insist your child pay interest on any payments that are not made in full by month’s end.
And if your children want to buy something you suspect they will be unable to pay back within a month’s time, I suggest you allow them to learn a lesson by making a mistake, so long as you are prepared to pay the bill at the end of the month. This financial expense will be worth the valuable lesson you will be teaching children about credit.
Obviously, we want our children to be responsible all of them time. But the reality is that they will make mistakes when learning something new. Wouldn’t you rather that they have already made a few mistakes in the safety of your home? I know I want my children to know what constitutes a high interest rate and how much debt they can reasonably carry without hurting their pocketbook. I want them to plan for paying off whatever debt they might accumulate. And I don’t expect them to simply stumble into this knowledge.
They will need to learn it somewhere, and this starts by allowing them to make mistakes along the way.
Consider two scenarios. In the first scenario, your daughter leaves for college without ever having experienced use of a credit card. On her first day of school, she walks by a booth in which a credit card company is promising approval. Your daughter signs up on the spot and receives a $500 credit limit on her first credit card.
The next week, she receives another credit card in the mail. She didn’t sign up for it, it just arrived. This credit card has a $1,000 credit limit. During the first week, your daughter goes on a shopping spree and maxes out her credit cards. And then she receives the bills, which have a minimum payment of $30 each.
She puts them on her desk and forgets about them. After all, she does not have a system of paying bills, and she is short on cash. The next month, her minimum payment on each card is $135, which includes the original $30 minimum payment, the next month’s minimum payment, and a $40 late payment. As well, because the late payment and interest have pushed her over the limit, she now has a $35 over-the-limit fee on each card.
Within one month, your daughter’s finances suddenly became desperate. She doesn’t have an extra $270 to pay both bills. What is she going to do? Turn to you to bail her out? Ignore the situation until it is turned over to a collection company? Hopefully, she will come to you for help, but regardless, the situation is not ideal.
Now consider the second scenario whereby you took a proactive approach to teaching children about credit. Your daughter is 16 and asks you if she can buy a DVD that costs $49.99. Because you can afford to pay the $49.99 added expense regardless of whether your daughter pays you back, you give her the credit card for this one purchase and tell her that she must pay you in full by month’s end or you will charge interest and a late payment fee. You explain that interest will be 29.99 percent, the typical interest rate assigned to new credit users, and the late payment is $40.
Because you want your daughter to experience the situation as it would play out in the real world, you send her one email notice, letting her know that the bill is due in one month’s time. Then you don’t speak to your daughter about the debt until the first day of the following month. You learn that your daughter forgot to make the payment. She now owes $49.99 for the DVD, plus $1.25 in interest and a $40 late payment fee—a combined total of $91.24.
Because you are committed to teaching children about credit, you sit her down and review the rules of credit card companies, showing her evidence that your terms are reasonable. In fact, you explain that in the real world, she is also over the preapproved limit that you, the creditor, set—$49.99. In the real world, she would also have to pay an over-the-limit fee, which would bring her total to about $126.24.
If she was unable to pay that balance down to at least $49.99, she would be charged an over-the-limit fee for each subsequent month as well. Tack on compounding interest and that $49.99 DVD is going to cost your child $196.24 in a few shorts months.
Instead, you offer your child a deal. She pays the $91.24, plus monthly interest, in three monthly installments, and you waive the over-the-limit fee. Next time, you won’t be so generous. Like any creditor, you will stay on top of her about making the payment. You might even call her cell phone early in the morning on a weekend to make sure she is planning to pay the bill on time.
Your daughter has just learned an important lesson in a safe environment in which you can protect your credit and her credit at the same time. So when she walks by that booth on the college campus, she will be better educated to make good decisions about credit habits.

How Often Should I Allow My Child to Use the Authorized User Accounts?
The answer to this question is as individual as the child. The frequency at which your children ask to use the authorized user accounts is a good indication of how responsible they are. If your children ask a few times a year and always pay the bills in full, you can be fairly certain that they are responsible with credit. If they ask a few times a month and often have trouble paying the bill in full at month’s end, then you probably want to grant access less frequently, making sure that one debt is paid in full before another line of credit is granted.
You will also want to spend time on subsequent steps making sure you are teaching children about credit education.
Related Articles
Teaching Children About Credit: An Introduction

Teaching Children About Credit: Step One

Teaching Children About Credit: Step One

Posted on June 10, 2011 by - CREDIT BLOG

Last week, I told you that I had a “crazy” plan for teaching children about credit. And I explained that teenagers who do not know about managing credit might be in trouble when they leave the nest. On the other hands, if you teach children how to build credit, they will have an advantage.
This week, I’m going in-depth with Step One of my seven-step plan for teaching children about credit.
(Step One, incidentally, is the step that sounds the most crazy!)
Teaching Children About Credit: Step One—Add your children as authorized users to one of your existing credit card accounts.
Let’s get this out of the way: an authorized user is someone who has permission to use your credit card, even though you are responsible for paying the bill. That’s right—an authorized user has no legal obligation to pay a bill.
Nonetheless, I think you should add your children as authorized users to one of your existing credit cards.
But let me be very clear: Unless you have extremely mature children, you should not give your child a physical credit card (at least not yet). If you are just starting the process of teaching children about credit, your kids could very well misuse a credit card, leaving you with a pile of debt, a higher utilization rate, and a lower credit score.
So clearly, you must protect your pocketbook and credit score, which is why I say you should not give your children a physical credit card. In fact, you might not even want your children to now that they have been added as authorized users yet. And be sure your children cannot access your financial records or account numbers. In doing so, you can begin building your child’s credit score without exposing yourself (or your children) to the dangers of an immature credit user.
Okay, with all those precautions out of the way, let me explain why I think this is a critical step of teaching children about credit.
Listing your children as authorized users comes with a host of positive outcomes:
1. You will set the stage for later steps of teaching children about credit. We will talk about this later, but briefly, once you start teaching children about credit, you might want to give your children access to a credit card so that they can make small, pre-approved purchases, like paying for a $20 dinner or a $10 movie.
2. Your children will begin developing a relationship with the credit card company. Eventually (when your children become adults), your child might want to apply for a credit card company of his or her own. If your child has been an authorized user for years, he or she will receive better terms, so long as your account has been in good standing.
3. If you use the right account, your children’s credit scores will rise. In short, you should choose a credit card that:

  • Is and will remain in good standing. This means you have always paid it on time and you will always pay it on time!
  • Has a low utilization rate.

One last thing about teaching children about credit by adding them as authorized users: If you are ever late on a payment, remove your children as authorizes users immediately. This will preserve their credit score. And be sure to join us next week for the next part of this series!

Teaching Children About Credit: An Introduction

Posted on June 6, 2011 by - CREDIT BLOG

I’m about to say something about teaching children about credit cards. And you are probably going to think I’m crazy.
Here goes …
If you have teenage children, you should give them access to your credit accounts.
Now, I know what you are thinking …
What? My teenagers can’t even pull their pants to their waists, much less manage credit responsibly.
And this is exactly why I think you should give kids access to your credit accounts.
Because most minor children never buy homes, apply for lines of credit, or purchase cars with installment loans, most have no credit. And credit bureaus assign really terrible credit scores to people with no credit. In some ways, no credit is just as bad as poor credit.
So if your kids go out into the real world without first establishing credit, they will pay higher car insurance premiums, and they will pay higher interest rates on their first car loan and credit cards. Landlords might not want them as tenants (or you might be required to co-sign), and some employers might not hire your kids.
In other words, your children will be at a disadvantage when they leave the next.
So while I might sound a little crazy for suggesting that you give your teenager access to your credit, weigh the dangers associated with not teaching children about credit cards.
Teaching Children About Credit? If you aren’t, here is Danger Number 1:
As soon as they become adults, your kids will be heavily solicited by credit card companies. They will receive offers for credit cards with astronomically high interest rates and fees. Your kids might walk by booths on their college campus, pick up a credit card application, fill it out, and agree to lousy terms with interest rates that will cost them an arm and a leg.
Teaching Children About Credit? If you aren’t, here is Danger Number 2:
If your kids don’t know about credit cards, and have experience using them, they will likely try to establish credit by using methods that don’t work. So they will end up with lousy scores, and overpay on car loans and credit cards. And, like I said, they might even be turned down for job opportunities.
Teaching Children About Credit? If you aren’t, here is Danger Number 3:
Guess who your kids will turn to when they need financial assistance? Probably you, the parent. And if they are paying high interest rates and unschooled in debt management, they will likely need to borrow money from you.
But as the old adage goes, if you give them the tools to fish and teach them how to fish, you will never need to give them fish again.
Over the next few weeks, I’ll take you through my seven-step plan for teaching children about credit! Stay tuned!

Teaching Children About Credit Cards

Posted on March 3, 2010 by - Credit Cards

With the past 18 months reminding us to be thrifty, many parents are realizing the importance of teaching children about credit cards. In particular, we need to teach children how to build credit by using credit cards wisely and, perhaps more importantly, how to protect their finances from misuse of credit cards.
Though the Credit Card Act of 2009 intended to protect consumers from the credit card industry, the truth is that we should be equally concerned about protecting consumers from themselves! Without proper education, our children risk repeating our mistakes. Indeed, “just charge it” seemed a mantra in the 1990s and early 2000s. Middle-class families ended up paying tens of thousands in interest rate debt.
Leveraging the lessons we learned from the recession, we should all begin teaching children about credit cards so that future generations make wiser choices when it comes to charging debt.
Teaching children about credit cards starts at home by allowing your children to make small, approved purchases with your existing credit cards. I know this sounds crazy, so let me clarify: I do not think you should give your child unlimited access to a credit card with a $20,000 limit. That would be a recipe for disaster.
But how about handing your seven-year-old daughter your credit card when she wants to purchase an $11 toy? Allow her to participate in the process by handing the credit cards to the cashier. Tell her to hold onto a copy of the receipt showing you how much money she owes you. Then have her repay the debt by handing you cash she earns from household chores or an allowance.
And how about older children? Teaching children about credit cards can continue when your children enter their teen years. Hold monthly finance and credit meetings where you review credit card statements, discuss interest rates, and explain how the credit scoring systems works. Consider your own “credit card score,” a term I coined to describe how helpful a person’s use of credit cards is in building his or her credit score.
If your finances (and your utilization rate) can handle it, allow your teenager to make a larger purchase. Then charge interest. If your child fails to make a payment on time, charge a late fee.
Do not, however, get angry or ground your child. When teaching children about credit cards, try to establish a scenario that would happen in real life. The credit card companies would never ground a customer for failing to pay a bill on time. They would, however, call their customers at 8 a.m. to remind them that the bill is due. Feel free to call your teenager’s cell phone at the crack of dawn to remind her that her payment is past due.
In fact, you should embrace a mistake that your child makes while at home. Learning lessons early, when the repercussions are minor, is far better than learning them when the stakes are high.