Give kids a little credit (info)

Between credit cards, debit cards, online payments and gift cards, we just don’t use cold hard cash very often.

Part of the challenge parents face in teaching their children about money is that most spending these days is virtual. Between credit cards, debit cards, online payments and gift cards, we just don’t use cold hard cash very often.

After a couple of years of getting a weekly allowance of $2, Adam has a good grasp on the concept of earning, saving and spending money. But when he asked me recently how he could get his own credit card (he’s only seven!!) I realized that—as is often the case—the example his Dad and I set with our spending habits carries more weight in the long run. And most of the time, he sees us using our credit cards, not cash.

So I knew the time was right to talk to him about how credit cards work—and the way we use them in our family. I explained how the credit card company pays the store for us when we use the card to buy something and, at the end of the month, we pay the credit card company back for all those purchases. (It’s true; we never carry a credit card balance. We have an approved line of credit in case we run into cash-flow issues but, thankfully, we haven’t needed to use it yet either.)

I made sure Adam understands that we don’t use our credit cards unless we know we have enough money in the bank to cover the cost of the purchases—and that the main reason we use credit cards is for convenience and to have a monthly record of all our spending. (Plus we earn points, but that’s a lesson for another day.)

When he’s a little bit older—and certainly before he gets that first credit card—I’ll need to explain about the crazy double-digit interest most credit cards charge on outstanding balances. It’s not an easy concept to learn, particularly in the abstract. After all, why would anyone want to pay all the money they owe at the end of the month, if the credit card company is happy with a much smaller minimum payment?

That’s when I’ll bring in reinforcements. A credit card payment calculator, like the one on the Financial Consumer Agency of Canada website, is a far better teacher than I could ever be on this topic. It shows exactly how long it will take—and how much it will cost in the long run—to make the minimum monthly payments. So, for example, a balance of $1,000 with an interest rate of 18% will take 10 years to pay down, and will cost a total of $1,798.89. That’s nearly $800 in interest! On $1,000! If numbers like that don’t get a kid’s attention, I don’t know what will.

Have your kids asked you about credit cards? What did you tell them?

About the Author

Tamar Satov

Managing Editor, CPA magazine
Tamar is a journalist specializing in business, parenting and personal finance. She blogs regularly in this space with advice and anecdotes on her efforts to raise a money-smart kid.