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By Scott and Bethany Palmer, The Money Couple
My son Cade and I were shopping the other day when he asked me to purchase something for him.
I told him, “Sorry, bud. We can’t afford it.”
His reply hit me like a brick in the head: "C’mon, Dad, don’t worry about having the money today, just put it on a credit card!"
Holy sh*t, I thought to myself. I’ve been a financial planner for the past 20 years, I’ve helped thousands get out of the debt, mom and I are
"The Money Couple" for crying out loud, and you just said that?! … Unbelievable.
I talked with Bethany that night and we decided that kids today (ours, and likely yours) need far more teachable moments about navigating our modern plastic world.
So, here are 4 practical, teachable parenting tips for you and your kid——so you don’t find yourself completely floored like I was (or worse yet, deep in kid-created debt).
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1. Get Your Teen A Credit Card
That’s right. Sign your son or daughter up for a $500 credit card, or one with a maximum spending limit you are comfortable managing with your child.
John Parfrey, director of the High School Financial Planning Program for the National Endowment for Financial Education (NEFE) says, “Managing credit is all about establishing healthy habits and patterns early.” He, and other finance experts agree—credit card use and education should occure before a child graduates high school.
We suggest you discuss upcoming purchases, let them charge a little each month, track their spending real-time, and then sit down with the statement at the end of each month. Talk through their expenses, the good and not-so good, and thoroughly explain how interest charges work.
Show them how important it is to pay off the card every month. Point out the benefit of better credit down the road (the ability to get a loan for a nice car might get your teens’ attention). And explain the importance and freedom of not being reliant on the card, or feeling like they’re drowning in interest payments.
2. Is Teen In Debt? Let Them Dig Themselves Out … Don’t Do It For Them
If your teen already has a credit card balance they are carrying from month to month, it’s time for some tough parenting. Tell them to dig themselves out … NOW. Encourage them to work hard to pay it off. Consider holding the card for them until they pay the balance in full. They can start fresh once they clear the balance on past purchases.
This is one lesson better taught sooner than later. We all know how quickly purchases and interest and can add up.
Establish boundaries now. Let your kids know that you are not their personal bank. Nor are you responsible for bailing them out of financial trouble.
But also celebrate with them when they pay off that last borrowed cent. Present their card back to them with a word of congrats and faith in their ability to do well this month.
3. School Them On Interest
Teach your child about interest—how it’s calculated, how it adds up month after month, how much more an item costs months later if it wasn’t paid off right away.
Even young children can learn about interest and debt. Start by showing your child 10 pieces of candy. Next, show them your credit card that they see you use at the store or for making online purchases. Explain how the card is your promise to pay for the candy later, and how that promise can cost more if you don’t pay for the candy when they ask.
Ask them if they would like 10 pieces of candy or 8. When they say 10, explain how a credit card basically gives you the 8 pieces, but charges you for the 10.
Help them understand the true “price” of using a card to pay for something you can’t truly afford to pay for in the moment.
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4. Unveil The Mystery
Adults find credit cards confusing, so it’s no surprise that kids find them baffling, as well.
Most kids view this mysterious, magic piece of plastic as completely different from “real” money. So, make sure they fully understand how real your purchases are.
Next time your statement arrives, sit down with your kids and show them the purchases you made. Point out the times you were together at the store and how you really did get charged for all the groceries, meals out, and gasoline.
Show them how you take the money from your checking account to pay off the bill. Let them see how you use money you worked all month to earn to pay off the amount. Have them find the interest charges on the bill the credit card company is ready to charge you if you don’t pay off the balance.
If you do carry a balance, explain how many months back you are still paying off. Remind them of the candy example. Maybe you’re getting all 10 pieces of candy, but by now you’ve paid for 13.
No one is perfect when it comes to using credit. It’s tricky for a lot of adults and definitely for new credit card users. But the time you spend educating, reviewing, and working with your children to understand the “price” of credit cards is worth every penny. How have you helped your teen understand the benefits and dangers of credit cards?
Scott & Bethany Palmer are YourTango financial experts, authors, TV/radio personalities and sought after speakers. Their mission is to help people improve their relationships through a better understanding of their approach to money.
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