Give Credit Where Credit Is Due
By Dara Duguay
Spring 2009
The summer before their children, Margot and Noah, left to start college, Warren and Debby decided their teens needed some experience with credit cards. After all, they had been reading stories about how college students were bombarded with offers for credit and how many of them were graduating with serious consumer debt in addition to their student loan obligations.
To avoid this scenario,
“What is the most important type of history?” he asked.
“Ancient history?” Noah ventured.
“No,”
Both Margot and Noah obtained jobs that summer. They were earning about the same amount of money, which their parents said was theirs to spend as pocket money for the summer or to put away to supplement their spending money while at college.
Anticipating her first paycheck, Margot went to the mall after her first day of work, using her new credit card to pay for some clothing purchases. She felt that using the card was justified, since she would have spent cash on these items anyway, although probably not until she actually had the cash to spend.
Margot found the credit card very convenient, particularly for ordering online. Most of her purchases didn’t amount to more that $50, but she was making several purchases each week.
When the credit card bills arrived,
“Do you have a plan for how you are going to cover this bill?” her father asked.
“Well, it couldn’t be any more than $200… is it?” asked Margot, suddenly concerned.
“Only about four times that,” replied her mother.
“Yikes,” was all Margot could manage. She wouldn’t make much more than that all summer.
Next they summoned Noah. It turned out that after his father’s warning about the misuse of credit, Noah had decided it was simply too risky to use the credit card. He put it away in the top drawer and left it there.
But although Noah was able to sidestep his sister’s situation, he also had failed to demonstrate to his parents that he knew how to use the card responsibly.
Consider these additional ideas to help prepare your children for the world of credit:
- Explain to your child the difference between a credit card, where payments can be extended over time; a charge card, where all charges must be paid at the end of the month; and an ATM card, which can be used instead of cash but is linked directly to “your money.” Discuss the benefits and drawbacks of each.
- When your child seems ready, arrange for him to have an ATM card that deducts the amount “charged” directly from his bank account. Over time, you can then observe how carefully your child uses the card. Be sure to advise your child of the consequences of overdrawing the account.
- Teach your child that credit is not free – in fact, it can prove quite expensive. Using a credit card to seize the opportunity to buy an expensive pair of jeans on sale may result in paying even more than retail if the bill isn’t paid off immediately. Have them calculate the “real” cost of credit purchases.
- Explain that credit cards are not created equal. The interest paid on purchases, stated as an annual percentage rate (APR), can be different for purchases, cash transactions and balance transfers. Credit cards can have fixed or variable APRs and different lengths of grace periods before interest is charged.
- When your child is ready, open a credit card account with a low credit limit, clearly explain proper and improper uses of the card, and closely monitor use for the first year or so. Don’t let mistakes turn into battles, but rather see them as an opportunity for dialog with your child.
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Dara Duguay is Director of the Office of Financial Education for Citi and the author of several self-help personal finance books. This article is excerpted from “The Citi Commonsense Money Guide for Real People.” Military Money readers can order it at a VIP discount from www.commonsensemoneyguide.com.
