No doubt you have shared the adage “if it sounds too good to be true, it probably is” with your children. That caution is wise, especially when teaching your kids how to use credit cards responsibly, because misuse of credit can have a long-term impact on financial health. The main lesson you want to impart: While credit cards can be very useful financial tools, the borrowed money is not “free.” Here are two opportunities to share that lesson.
When choosing a card. Show your kids the entire credit card lifecycle. Explain that when evaluating credit cards, a comparison of benefits is crucial. For example, although choosing a credit card offering a large signing bonus may be tempting, the annual fee associated with the card can mean the benefit is not worth the cost.
Also, make sure your kids grasp the concept of the annual percentage rate (APR). The APR shows the cost of credit as an annual rate that includes points, fees, and other adjustments, and allows the comparison of offers from different card issuers, or different types of cards from the same issuer.
When making payments. Have your kids review the monthly statement with you. Let them see the time lapse between the date a purchase is charged to when the bill is due, and mention how quickly the balance can add up over time if good spending habits are not followed. Explain the consequences of paying only the minimum required amount each month versus the entire amount due.
When teaching your kids good credit card skills, you don’t have to have all the answers. Learning together gives you an opportunity to strengthen your understanding of card features and terms as well as your child’s understanding.
If you have questions about teaching good credit card skills, please contact us at Cisco & Co CPAs. We can help you and your child learn more about credit card responsibility.