Instead of letting external sources influence your kids, educate them about Credit Cards yourself. Here’s how!
‘Children are like wet cement. Whatever falls on them makes an impression.’ Isn’t this quite true for children? Whatever they do or plan to do generally depends on what they were told. So, adults and as well as a child’s surroundings have a major influence on children.
If you are a parent, you probably already know how easily kids can get influenced by something they watch on TV, read on social media or hear from their friends. So, before they end up in a financial pickle later in life, this could be a great time to educate them on how to and how not to use a Credit Card.
Like it or not, we currently live in an era where Credit Cards rule the world. Whether it’s shopping online or booking tickets for an event, Credit Cards can do it all. In fact, so much so, that Credit Cards have become an almost indispensable part of most people’s lives.
There’s a good chance that at some point in time, while you are swiping your Credit Card or referring to its number to make an online payment, your child may ask you questions out of curiosity. It could be the perfect opportunity to educate him or her about the pros and cons of using a Credit Card.
Additional Reading: How To Teach Your Children About Money
If your child is a teenager, he/she will be quite excited to get a Credit Card as soon as possible. So, instead of footing a massive Credit Card bill, show them how Credit Cards need to be used responsibly. By doing so, your child will probably turn out to be a wise Credit Card user instead of a careless spendthrift. Educating your child about the use of a Credit Card could play a big role in ensuring that his or her Credit Score remains healthy over time.
The best way to teach your child about how Credit Cards work is by letting them borrow some money from you and asking them to repay it using their pocket money. This way, they will learn the importance of paying back what they owe.
You could also ask them to pay an interest amount as a penalty if they ever fail to repay the EMI on time. This will help them realise the importance of paying Credit Card bills on a regular basis.
Now let’s delve into some important lessons that you need to teach your child about Credit Cards.
Lesson 1: Credit Card dues have to be repaid on time, every time!
One of the main things that you need to explain to your child is the difference between a Debit Card and a Credit Card. While both look similar, they function differently.
Explain to your child that when one swipes a Debit Card, they use money from their account. However, when one swipes a Credit Card, they actually borrow money from a bank, which has to be repaid, either all at once or in easy monthly instalments.
A Credit Card holder receives a certain fixed amount of credit from the bank, which can be used, repaid and used over and over again. And while there’s an option to pay only the minimum balance or repay the amount in instalments, it attracts interest as a penalty, which will only increase each time one delays a payment.
Additional Reading: Paying Just The Minimum Due? Here Is How It Could Harm You!
Lesson 2: There’s a credit limit that they need to be aware of
Each Credit Card comes with a pre-decided credit limit based on one’s eligibility. A credit limit is the maximum amount of money that a card holder can charge on the card. However, while explaining this to your child, stress on the fact that one shouldn’t use more than 30% of the credit limit.
To simplify things, multiply the Credit Card’s credit limit with 0.30. The result that you get will be the ideal maximum balance that one should not go beyond on their Credit Card. Anything below 30% of the credit limit is a safe bet.
Don’t forget to warn your child about the disadvantage of carrying a huge balance, which is, they won’t be able to use the Credit Card in case of an emergency. Also, emphasise on the benefits of carrying a low outstanding balance. Tell them that the lower the outstanding balance, the lower will their bill will be, which in turn will make repaying it much easier.
When the outstanding balance is low, the credit utilisation is low too. Explain how a low credit utilisation ratio will help them build their Credit Score, which is one of the most important factors considered by banks and moneylenders before sanctioning a loan or any type of new credit.
Additional Reading: The Pros And Cons Of Increasing The Credit Limit On Your Credit Card
Lesson 3: Credit Cards shouldn’t be your heart and soul
It’s only normal for a child to get confused between a Credit Card and Debit Card, which is why you need to introduce them to the former by telling them the difference between the two. Considering how both these cards look visually alike, your child could assume that you use your Credit Card for all your purchases.
So, you need to inform him/her that it isn’t the case. You should teach them that the money that they have earned is what should be used for purchasing things they need or want and to fall back on Credit Cards either to pay bills or to shop.
Paint a picture in their head about situations when one should use a Credit Card so that this memory stays with them forever and they will adhere to it no matter how old they grow. You have to make them understand that too much dependency on a Credit Card is not a good thing. It’s meant for occasional use and that’s how they should use it by not relying only on it.
Additional Reading: 10 Top Of The Chart Credit Cards Of 2017
Lesson 4: Don’t let anything influence you into impulsive shopping
In this modern era of advanced technology, there are a plethora of advertisements everywhere. Whether it’s huge hoardings, TV, radio, newspapers or even social media, attractive advertisements are everywhere.
Teach your kid how not to get swayed by these advertisements. Apart from advertisements everywhere, peers, friends, and family also greatly influence children. Tell them that if they give in to every tempting ad, their Credit Card debt will surely pile up.
Make them understand that they are in control of their choices even when they get a Credit Card, and they need to choose wisely.
Additional Reading: Is Your Credit Card A Boon Or Bane?
Lesson 5: Missing payments spell doom
Most kids are used to their parents being patient with them, but you have to tell them that not everyone is going to be patient with them, especially Credit Card providers. They need to understand that they can’t take their credit for granted. Ever!
Although the bank executives won’t come knocking at their door in case of one late-payment, they will charge late-payment fees and penalty charges, which will burn a hole in their pocket.
Explain the entire picture to them. Firstly, the outstanding balance will keep increasing, given the high-interest rates and penalties. Secondly, they will be held responsible by the Credit Card provider, who will try various methods of getting in touch with them. If they miss a payment, ask them to be prepared to receive numerous calls and letters from their Credit Card issuer. And if they still fail to clear the outstanding balance, the Credit Card provider will report them to credit bureaus.
Irrespective of how large or small the outstanding balance is, they need to understand that they could receive a legal notice too and all of this will appear on their credit report.
Also if you were a co-signee at the time of getting a Credit Card for your child, you too will be held responsible for their irresponsibility. Hence, they need to be doubly careful with their spending. If they are unable to pay their dues, your credit history could drop as well and the account will be closed.
Choose your words carefully while telling them how one mistake could ruin their Credit Score as well as yours. They need to understand that it’s a subtle warning to use a Credit Card responsibly.
Additional Reading: The Fault In Your Credit Score And Not Your Stars
Lesson 6: Financial mismanagement won’t leave your records anytime soon
You also need to explain to your children that any credit mistakes they make are not easy to wipe off. The price that they will have to pay for delayed or missed payments could be very high. It could have an adverse effect on their Credit Score in the long run.
Make sure your children are well-informed about the consequences of a poor Credit Score. If they are looking for a job and the employer does a background check, a low Credit Score could scupper their chances of landing the job.
What’s worse? If your child plans to buy a car, his/her Car Loan application may get rejected due to a poor Credit Score. In fact, if your child is seeking any kind of loan, he/she will have to struggle a lot to find a bank or moneylender willing to lend them money, given to their past record, even if it’s been a few years since.
Ensure that you clearly help your child consider the consequences of using a Credit Card irresponsibly. Tell them that a Credit Card may be a small part of their lives, but how they use it could have a great impact on their finances in the future.
Additional Reading: How To Be A Disciplined Credit Card User
Lesson 7: Don’t forget about your Credit Score
Inform your child about the importance of a Credit Score and how it works. Each time one borrows credit, it is noted in their credit report.
How this credit is repaid will decide if the Credit Score will get better or not. Availing credit is not a bad thing. In fact, availing credit and repaying it religiously will only boost your Credit Score.
However, if one borrows credit and doesn’t pay it back on time, his or her Credit Score will shoot downwards. Advise your children to always pay their Credit Card outstanding balance in full and before its due date.
As mentioned above, emphasise on how it’s important to have a low credit-utilisation ratio. When they successfully follow all of this, they will build a good Credit Score, which will help them negotiate with banks to get lower interest rates on loans and improve their chances of getting a loan approved.
Additional Reading: 10 Myths About Credit Score And Credit Report
Lesson 8: Swipe only when you can repay easily
When you explain how Credit Cards work to children, they are bound to assume that there will be more financial freedom, which in turn may cause them to spend recklessly. However, you have to put an end to that thought in your child’s mind.
As repetitive as this might sound, explain to your children that just because they have a high credit limit, it does not mean they can or should spend it all. Unless they can afford to repay the balance easily, they ought to refrain from swiping their cards.
Swiping more than they can afford to repay will lead to numerous other problems. To begin with, they will miss or delay Credit Card payments, which in turn will attract late payment fees and high-interest rates. This will be noted in their credit report.
Inform your child that while you will have their back in life if they need help, it won’t necessarily apply to Credit Card debt. Tell them that if they commit the mistake of reckless spending and create a huge pile of debt, they have to deal with their mistake and learn from the experience.
This will help your child become a responsible adult, as he/she will always think about their income and how much of it can they afford to put aside to pay their Credit Card bills. This, in turn, will help them use their Credit Card wisely.
Most kids will automatically behave more responsibly if you, as a parent tell them sternly that come what may, you won’t cover up for their mistakes. A statement like this will intimidate your child enough to stay away from any unnecessary expenses.
If your child is still too young to own a Credit Card, you can still inform him/her about the basics of Credit Cards. If your kid is in his/her early teens, they need to know all of the above-mentioned information by now. This will help them train themselves to deal wisely with money.
In fact, with your teenager, you can do the exercise mentioned above, which talks about lending money to your child and asking them to repay. This exercise will prepare them to use a Credit Card.
Is your child already 18? Well, you can either start off by gifting him/her an add-on Credit Card. However, if your child is employed, he/she will be eligible to get their own Credit Card.
So, what will you do if they apply for a Credit Card and get one? Don’t panic. With all the tips mentioned above, your child is likely to use the Credit Card carefully. However, we have something for you to do at this stage too. As much as children in their late teens hate being questioned by their parents, this one is a must.
Every once in a while, you could ask your child about how he/she is managing their Credit Card. If they have any doubts regarding the Credit Card, clear their doubts with the right answers. If you don’t know the answer to their questions, look it up on a search engine. We bet you will find relevant links to share with your child.
At this stage, it’s very important to give the most accurate information to your child because a small mistake from your end could cost him/her their Credit Score.
Additional Reading: 5 Common Credit Card Delusions We Suffer From
Looks like you now know everything that you ought to tell your child about Credit Cards. Make sure you never let your child get a Credit Card for the wrong reason. As the saying goes, ‘knowledge is power’.
Additional reading: Credit Card Handbook: All Questions Answered
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