Paper or plastic? Kids, cards and credit

A surgeon client recently asked me one of the best questions I've heard so far this year: "When should I give my kid a credit card?" As a parent, you want your child to have every advantage that will allow them to compete in and contribute to their community and their world. You know that credit is part of living in the modern economy, and you know it's important to establish and maintain an excellent credit history. So naturally, you want your child to get an early start on their credit history, and build it responsibly.

But do kids and credit mix?

Let's consider what your child will need to know before they can use a credit card responsibly.

  • Good citizenship: They need to be able to understand honor a legal agreement, since a card holder enters into a legal agreement with the card issuer, promising to repay their debt in a timely fashion.
  • Higher math skills: They need to know that compound interest is a double-edged sword, and that it cuts both ways.
  • Strong sense of time: They need to comprehend the balance between their near term wants and the long term consequences that come from the use of credit.

As the parent of a credit-wielding youth, you need to be prepared, too. Here are some questions for you to consider:

  • Am I prepared to rescue my child from a credit crisis? And if you said, "Yes, I am," then are you prepared to rescue them repeatedly? Usually people (adults and children) who abuse credit cards will do so time and time again.
  • Am I prepared to allow my child to learn a hard lesson? One of the ways your child will grow and prosper is to learn from their own mistakes. But the mistakes that come from mismanaging a credit card - including bankruptcy - can have far reaching consequences.
  • What will they buy? What items or services do your children really need, and is a credit card the only way they can acquire these goods?

The best advice I can give with regard to kids and credit is to educate early and often.

  • If you have young children, begin by talking to them about making and honoring agreements. Reinforce the concepts of honoring your word, and following through. Teach them the value of money, and how it can help and harm them and the people they know.
  • If you have elementary-aged children, discuss credit with them, and use familiar phrases and analogies. For instance, borrowing money is much like renting a video. The interest on the principal is like rent, and you are actually "renting money."
  • If you have kids in middle school, become the First International Bank of Mom and Dad. Allow them to borrow from you in managable amounts for acceptable purchases. Make sure to charge interest at a high enough rate that they will feel the sting at repayment. If they fail to repay in a timely fashion, be a responsible creditor, raising their interest rate next time, repossessing ill-gotten booty, or even refusing to grant credit next time they need it. Hold the line so that they will learn from the experience (better you than the real-life creditors they will encounter).
  • If you have kids in high school, teach your child how to read the terms of a credit card application. Help them to understand the depth and scope of the borrower-creditor relationship. Let them look at your credit card statement and have them run a calculation about how how long it would take to repay your balance if you merely paid the minimum balance.

These stages of learning are crucial. Once your kids leave your house and enter college, it's "game on." They will be approached by creditors in virtually every venue, enticing them to sign up for a credit card, often with onerous terms. If they're armed with the facts, your children can avoid an expensive lesson in college, and beyond.