Updated: 9/20/2011 3:40 PM ET|
Should kids carry credit cards?
Tales of other people's credit woes can be a learning tool for your children. Whether or not you trust them with plastic, it's important to teach the pros and cons of credit.
Now is a great time to teach your children how to manage money. As news stories detail the travails of Americans who took on too much debt, parents can use examples in the current economy as a way to talk to kids about the risks of credit.
"Look at all the news stories that show people who have lost their homes from too much debt or are incurring substantial interest charges or who have bad credit and can't get an apartment or job. It's a wonderful way for parents to teach their kids about credit or debt," said Ric Edelman, an author and financial adviser.
But parents may be wary of introducing their kids to credit cards, especially after hearing horror stories of young adults with several cards and thousands of dollars in debt before even graduating from college.
A 2009 federal law makes it much harder for young adults to get credit cards on their own. Under the Credit CARD Act, consumers 18 through 20 cannot get cards in their names unless they get a parent or guardian to co-sign, or they can prove they have independent means to repay their balances. (A child under 18 can be added as an authorized user to an adult's credit card account and have a card issued with his or her name on it. However, the parents must agree and bear responsibility for repayment.)
So, is it really a good idea for parents to be the ones introducing kids to credit cards?
The experts say yes. It's important to teach children about credit, as well as cash and debit cards, so they are prepared to handle their personal finances when they become young adults.
"There's a time and a place for all three," said Jordan Amin, the chairman of the American Institute of Certified Public Accountants' national CPA Financial Literacy Commission.
"Cash and debit are for immediate purchases, and credit is for a longer-term purchase or an unexpected expense," he said. "A credit card shouldn't be used for discretionary items."
Current events can be used to teach kids about the pros and cons of using cash versus credit versus debit, experts said. Here are some points to keep in mind when introducing your kids to using money.
Cash is king
For younger kids, cash is a good way to introduce them to money. Credit and debit cards are too abstract, Amin said. "Something that's tangible and universal makes it easier to teach them," he said.
Cash is especially useful for teaching children about regulating their spending, said Kathleen Gurney, a psychologist and chief executive of Financial Psychology, a Sarasota, Fla., advisory company.
"There's the tangibility issue," Gurney said. "People will tend to spend less money when spending cash than using a credit or debit card because the cash is finite. If you only have $10 cash, you can't spend $30. So for kids, cash is always a great way to teach them to use money more wisely."
Gurney also recommends that parents teach their kids to use less cash than they have.
"Most kids will want to go through all their cash and more," Gurney said. "If they have $10 and want to buy something for $12 or $13, they are always bargaining and trying to get that extra $2 or $3. Teach them to buy something within that $10."
Credit cards are a reality of life, and parents can help teenagers spend wisely by teaching them about the proper uses of cards. Debit cards and prepaid cards can also be useful budgeting tools, because they can help track spending, experts said.
"Give them an allowance on a prepaid card and talk with them at end of the month about where they spend money," said Jason Alderman, the senior director of financial education at Visa.
A prepaid card is a great way to teach kids about self-regulation, Gurney said.
"Lack of self-regulation is one of the most significant issues that I deal with in helping people become better money managers," she added.
Gurney suggested parents introduce kids to a card after children learn how to spend cash within limits.
"Once they know how to regulate their spending, they will know how to pay off a card," Gurney said. "If they are off to a good start and have a good experience, these are lessons that will stick to them through life. There are so many people that really don't know how to use credit appropriately, and it's because they never developed the discipline of self-regulation."
Family money values
Whether your family lives on cash or plastic, or uses both, Alderman recommended teaching kids about your family's choices.
"The most important thing is to make sure you instill your own money values with kids. If you are a family that shies away from debt and values cash, that's fine. Conversely, if you are a family that uses cards for everything, help them understand that, too, and why you make those choices," Alderman said.
Parents set a financial model for their kids, Amin said.
"So if your children only see you use your credit or debit card, that will certainly have an impact," he said. "We have to be mindful of how our spending habits influence our children."
Credit cards are not inherently bad -- it's how consumers use credit that can cause problems, Amin said. "It's running up debt for discretionary items where people get into trouble and it doesn't make a lot of sense," he said.
Right for your kid?
Parents can start to introduce plastic when their kids become teenagers, experts said. Amin recommended setting low limits for cards for kids.
"Let kids start small, so if they make mistakes it's not catastrophic to them or you, and let them learn to manage credit but with keeping a tight watch on how much they can spend," he said.
Not all kids will be well-suited to using plastic. "You have to be honest about who your kids are," Alderman said.
Parents who aren't comfortable with their kids having a card should still talk to them about the differences between payment vehicles.
"So many kids just see a piece of plastic, but we know that they are radically different," Alderman said. "You have to help the kids understand that."
This article was reported by Ruth Mantell for MarketWatch.
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Is this a joke?! Hell no they shouldn't! I'm teaching my children to not put themselves into debt. "DO NOT FOLLOW MOMMY & DADDY'S EXAMPLE" in other words.
It only took us 3 times to learn the credit card lesson but we finally did. We don't have any now & it feels great!
yes if they work and are going to be accountables for their own debt.
some adults should not even have their own credit card.
Until they get a job and pay for their own debts. My kids will not have credit cards! In the meantime, they will learn how to manage money w/ the cash they have now. My 8yo will be earning her allowance from doing simple chores each week. If she doesn't do them, she doesn't get paid. She already is learning the value and rewards for saving her money. It took her two years to save her own money to get her own American Girl Doll that she has wanted for such a long time. She is very proud of herself (so is Mom & Dad).
As long as PARENTS teach good values of managing money, then kids won't suffer the same mistakes their parents did.
Our 19 year old has been an authorized user on one of our cards for about 18 months. She can use the card for items she can't buy with cash (mainly online purchases such as college textbooks) and for gas/groceries she's buying for our household. She reimburses us for her expenses put on our card. Works like a charm and she's never charged anything for herself without letting us know ahead of time. Just added our 16 year old this month. Haven't given her the card yet until we have "the talk".
Plan to get them their own card right out of college. The wise use of credit is an asset.
I ran up $1,000 in cc debt right out of college back in 1985 buying the new job wardrobe, etc. Once it hit that level, it scared the crap out of me so I put the cards under my bed until I not only had them paid off, but also had an emergency fund saved up. Back to ramen it was. Have not incurred a fee/interest for the last 25 years as we pay off our credit cards every month. We do earn a hefty $500 - $800 annually for the cash rewards programs though.
Just because you use credit cards, does not mean you incur debt. We save up to buy a large ticket item (vacation/furniture, etc), then charge it and then pay off the cc. We plan to teach our children how to use credit to their advantage.
I love how everybody blames the credit card company for THEIR mistakes. A credit card can be a tool in a healthy financial life. A good credit card can be a hefty reserve fund in case of dire financial emergencies.
EDUCATING your children about money in all forms is healthy. Maybe they won't make the same mistakes you did. However, if you don't teach them about it, or guide them in the beginning, they are likely to fall into the debt trap cycle.
Personally, we're relatively frugal, but we use credit cards for their perks and never pay interest. I know their is research showing that people generally spend more on plastic, however, there generalities are just that - general.
Once again, credit cards are a tool. You can use or abuse any financial tool.
Research shows that even the sight of a credit card logo on some debit cards excites spending glands!
As for the CPA's suggestion that credit is for a longer-term purchase or an unexpected expense - get real! You don't spend what you don't have saved - that's what got us into this mess in the first place.
Americans have lost sight of what constitutes a financial foundation and rainy day fund. When I recommend that a rainy day fund be equal to two years of your household income, people look at me like I'm talking in a foreign language.
We're teaching kids and families how to avoid relying on ANY financing institutions by using the 10-10-10 Savings Formula.
Pamela Yellen, President
Bank On Yourself
instead of learning the hard way and paying for it for years
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