The parental refrain “Do what I say and not what I do” isn’t a wise one in many respects, but especially when it comes to financial talks with your kids.
Parents lead by example and if you’re racking up credit card debt you can’t afford, then you may be teaching them bad money habits.
Such oxymoronic advice can be confusing. The 2017 Parents, Kids & Money survey conducted by T. Rowe Price found that 48 percent of respondents have a credit card balance of $5,000 or more. Those parents are more likely than those who don’t to have kids who:
• Spend money as soon as they get it — 58% vs. 44%.
• Expect parents to buy them whatever they want — 65% vs. 57%.
• Say parents confuse them when talking about money — 67% vs. 51%.
• Say what parents say about money is different than what they hear in school — 65% vs. 53%.
Credit Before Car
How to get around all of that? Get your child a credit card, of course. It’s not as implausible as it sounds.
By working to lower debt and having continuing, honest discussions with their children about how to best use credit, parents can help their children start on the path to having good credit and being smart with money, years before they have a driver’s license.
The first difficult hurdle to get over is a reluctance to discuss financial matters with your kids. The T. Rowe Price survey found that 69% of parents have some reluctance to discussing money with their kids. Parents who have more than $5,000 in credit card debt are more likely than those who don’t to be reluctant, 35% to 21%, the survey found.
A piggy bank isn’t the only way kids deal with money. While most have a savings account (55%), 31% have an online or gaming account, 20% have a checking account and 18% have a credit card, according to the survey.
Who pays the credit card bill? Fifty-seven percent said they do as parents, and 41% said their kid pays the credit card bill.
How to Start Giving a Kid a Credit Card
There are a few ways to get your children started as credit card users. One is to add them as an authorized user on your credit card.
This will put their name on a credit card that they can use, but for which you’ll still be responsible for paying as the primary cardholder. Their debt becomes your debt, and any penalties for late payments will hurt the parents’ credit score.
To get your child their own credit card, parents will likely be asked to cosign because their children don’t have full-time jobs. This will also leave the parents liable for the bill.
If that seems like too big of a step for both of you, then get them a prepaid debit card that they fund and use like a credit card. It can only be used up to the amount put on the card, so no debt is incurred.
The BusyKid Visa prepaid spend card lets kids spend their allowance in stores. The card has a $5 annual fee and is issued in the parent’s name, but also has the child’s name on it. Parents can add money to the debit card by charging with their credit card.
What to Teach Kids About Credit
There are many ways to teach kids about money beyond setting a good example. Long before you give them a debit or credit card, you can show them what the inside of a bank looks like, take them shopping with a budget in mind, discuss the cost of college, figure out how much tip to leave at a restaurant or how much sales tax will be charged, and discuss why you can’t take a bigger vacation this summer.
Their teenage years are probably the best time to learn about credit. Before that, they should get a good foundation in money education by earning an allowance, having the freedom to spend their own money, and borrow money from you a few times to see how loans work.
Long before the credit card issuers send your kids applications in the mail to apply for new credit, here are some things to teach your children about credit cards:
1. This isn’t your money. A credit card can buy you all sorts of things without having cash in your hand, but it isn’t your money. A credit card lets the user borrow money as long as it’s repaid. The longer it takes to repay that money, the more interest they’ll be charged.
2. Purchases are limited. Credit cards have a credit limit. It’s a maximum amount that can be borrowed on the card, and charging more than that will cause the transaction to be denied.
Having a low credit card balance will lead to a better credit history. The balance should be 30% or less of the credit limit, so a $1,000 credit limit shouldn’t have more than about $300 charged to the card.
3. Pay on time and in full. Missing a credit card payment will hurt a credit score and mean paying interest and a late charge. If a credit card balance is unpaid for too long, creditors may sue to collect.
4. Only spend what you can repay. Teaching kids to be responsible is one of the big tasks of parenting. With a credit card, it’s important to get them to think ahead about how they’re going to pay the credit card bill about a month after they’ve bought something with it. They’ll need to learn to think ahead to the immediate future, and know that you won’t be bailing them out with a loan to pay their bill.
5. How a credit card will help or hurt their future credit use. Just like school, teens are being graded in how they use their credit card. They’re not being graded in what they buy, of course, but in on-time payments, how much credit they use and other things that affect a credit score.
Learn what goes into a credit score and go over them with your children. A high credit score helps people qualify for better interest rates and loans in the future, such as a car loan or paying a lower security deposit when renting an apartment. Credit mistakes made now could make it more difficult years later to get a job, get a good loan or rent an apartment.
Aaron Crowe is a freelance journalist who specializes in personal finance topics. Follow him on Twitter @AaronCrowe or at his website, AaronCrowe.net. He also writes about his family’s finances at CashSmarter.com.