The Pros and Cons of Credit Cards for Kids
For the sake of convenience, parents sometimes thrust credit cards into their children's hands. However, unless that parent shows the child the credit card bill when it arrives and requires the child to pay all, or a significant portion, the parent is not helping the child learn about fiscal responsibility.
If your child is using credit cards, he or she needs to know that when a bill arrives, the inability to pay it in full leads to additional (and substantial) charges, and that someone has to pay real dollars to make it go away. If you don't do this, your children may think the balance magically disappears or that they can continue to run up charges without incurring consequences.
Fact
In 1999, more than 150,000 teenagers filed for bankruptcy — constituting more than one out of 14 total filings in 1999. Recent studies have shown that more than a third of the nation's college students have four credit cards and average $2,800 in charges. In 2000, a third of all undergraduates had more than four credit cards.
Advantages of Credit Cards for Kids
Although many parents do give their children credit cards, the list of good reasons to do so is actually very short. The only pros to children having credit cards are these:
They can be used in emergency situations.
They can be used as a learning tool.
Since your children will be offered credit cards as soon as they are 18, teenagers do need to learn the dangers of relying upon credit cards, but it's best done under close parental supervision. If you go this route, assign a credit card with a $1,000 limit for them to use, and then make sure they receive and pay the bills.
If they carry a balance, show them how much interest they are paying and illustrate how that can substantially increase their costs. For example, $1,000 at 19.8 percent that is whittled down by minimum payments of 2.5 percent will accumulate $648 in interest over the 5.5 years it takes to pay off. That grows significantly if children continue to use the card during the five years. Instead, show them how to confront their debt and bring their balances down to a far more manageable level.
Ideally, you want your children to know the dangers they face if they accept credit card offers and rack up charges they cannot afford to pay.
Disadvantages of Credit Cards for Kids
The cons of giving your teenagers credit cards that you pay are far greater in number and far more compelling. They include the following:
Your teenagers don't have a real sense of money being spent.
They don't realize the real value of a dollar.
They don't learn responsibility for budgeting resources.
They develop unrealistic expectations about what they can afford.
They may become used to overextending, procrastinating, and living in denial.
They could rack up high bills you can't afford to pay.
They could start off on the wrong foot in terms of how they use credit.
The most important lesson you can impart to your children is not to spend what you don't have. If your children see you overextending yourself, they will adopt all the unconscious and conscious attitudes and behaviors that go along with it — charging to the hilt, acquiring credit cards to pay other credit cards, incurring massive interest, paying late, and continuing to spend. On the other hand, if you teach your children that they can only spend what they can pay for in cash, they will have a far more solid foundation for building and growing wealth.
What You Can Do
Instead, teach by example. Treat credit cards like emergency safety nets. If you have to use your credit card, show your teenagers how you immediately revise your budget, paring back on nonessential spending and allocating the saved dollars to pay the balance down to zero. Basically, when it comes to credit cards, teach your children the following:
The benefits of paying in cash
How quickly charges accumulate
How much interest adds to the final cost
How difficult it is to pay down excessive debt
The consequences of paying late, or failing to pay
Once your children are in college, keep them fiscally responsible by monitoring their credit status and helping them create and adhere to workable budgets. If they have credit cards, make sure they notify all their creditors when they move. If they don't do this, by the time the credit card company tracks them down, they will have incurred late fees and damaged their credit report. Remind them of the consequences, and encourage them to create a checklist to follow whenever they move.
