These days, students and credit go together like peanut butter and jelly. Most of the time, this relationship works out OK; students learn how to manage finances on their own, they learn from their mistakes, and they build up a credit history. Sometimes, though, things get out of hand.
How can you keep your college-bound freshman from swiping too much, or getting too deep in debt too fast? Here are three tips for making sure your child learns to use credit cards responsibly.
1. Clearly explain credit
For students and older adults alike, a lot of aspects about credit remain a mystery. One of the problems with credit cards isn’t that the interest rates are too high or the urge to swipe is too tempting, but that people just don’t understand the math behind compound interest. Credit card users who don’t pay off their balances each month end up paying interest not only on their purchases but previous interest charges as well.
To get this point across to your child, go over some sample scenarios by using an online calculator. Show your children what happens when they make only the minimum monthly payments every month, if they charge more than they can afford, and how long charges will take to pay off. A dry run of the data is enough for most people to set mental limits on how much they will spend.
2. Use the carrot and the stick
Young children love incentives, and chances are the older version of them do too. Rewards for good behavior and punishments for bad behavior can nudge you pre-adult kid in the right direction. So why not try it with credit cards?
The punishments can’t be too severe and the rewards can’t be too extreme. For example, encourage your kids to pay more than their minimum payments, and if they do it for a year, offer to pay 10% of the bill yourself. Likewise, warn them that if they get too in over their head and lose their good credit rating, you won’t be there to co-sign a home loan in the future.
3. Balance trust and access
Any good parent knows when their kids can be trusted, and any good parent will give their kids enough leeway to make their own decisions when it’s appropriate.
In addition to trusting your kids to make the right decisions, it doesn’t hurt to have a little access to information to make sure that they actually do make the right decisions. While cosigning for a credit card means you are responsible in case your child doesn’t pay the bill, it also means you can access the billing statements. With access to those statements, you’ll know when your kid has gone astray – and you might be able to act before it’s too late.
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