subject: Teach Children About Credit [print this page] Your child may have the false impression that a credit card is a great way to easily obtain material wealth. However, it is important that you let your child understand that a credit card is essentially a loan that you must repay over a designated period. You should also teach him or her how to use a credit card and the value of buying only what is needed and can eventually be afforded. It is said that college students account for 1 in 5 of all bankruptcy filings. You can make it less likely for this to happen to your child by imparting a bit of practical knowledge.
*Use your child's allowance as a way of teaching him or her about borrowing.*
Your child's allowance is a great way to begin teaching him or her about money. You can teach your child the value of saving for what he or she wishes to have. For example if your child wants a bicycle that costs $200 and the allowance rate is $20 per week he or she will need to save for a few months before buying the bicycle. However, you may offer to lend your child the money to buy the bicycle while taking an additional $5 from his or her allowance. At the end of the repayment period ensure you collect $220 or an amount that is more than the original to let them understand that burrowing will attract interest. In doing this you will be able to explain that a credit card works in the same way.
*Help your child understand the effects of interest.*
It is important that you let your child completely understand how compound interest works. Let them know that whatever interest is accrued on your credit card payments possibly due to paying the minimum balance or making late payments will be added to the principal amount. The amount added to the principal means that you will be paying much more than you originally intended to pay. Also explain to them that finance charges are also added in the process.
*Let your child understand the fundamentals of repaying what is spent using a credit card.*
Your child should be able to understand that any amount spent will have to be repaid over time. Let him or her know that the sooner the amount is repaid the better his or her chances of not acquiring a great debt burden.
*Explain how misusing a credit card may have dire consequences.*
Inform your child of how credit ratings and credit scores work. Tell them that all transactions on and payments made to a credit card will be recorded in a credit report that becomes an integral part of his or her credit history. The consequence of a bad credit history means a reduction in his or her ability to burrow in future and may lead to bankruptcy.
*Do not be the one to repay your child's debt.*
The last lesson your child may learn is that he or she is responsible for his or her debts. Do not make the mistake of ever paying off your child's debt as he or she will never learn to take responsibility for their actions.
by: Joyce Brown
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