Kids and credit: Teaching tool or just plain dangerous?
When Vancouver financial advisor Bryson Milley was growing up, he and his siblings used cash for everything. That changed when the kids started borrowing their parents' car.
His dad — who was also a financial advisor — grew tired of getting into the driver's seat so often to find an empty tank. So the Milley teens were given a gas card. But that first experience with plastic came with some expensive lessons.
"When the bill came, our parents would go through it and say, here's what we think you owe us,'" says Milley, director at Rogers Group Financial and himself a father of three. "There was always a reckoning to come at the end of the month, because mom wasn't about to let it go.
"When it comes to kids and credits cards, unless parents sit down and walk through the bill with their kids and make them responsible for transferring money to make that payment, there's a disconnect on the reality of it," he adds.
Whether credit cards can be teaching tools or just plain dangerous for kids depends on how they're taught to use them.
Bettina Schnarr, certified financial planner with Surrey's DWM Securities Inc. , says she remembers being in her first year of university when credit cards were offered to each and every student.
"You have to ask, 'Why would a financial institution be willing to give credit cards to poor students who have no money?' To make money," Schnarr says. "They know that a small percentage of them will rack up the $500 limit and then default on paying it. Then they raise the credit limit gradually, and these people are hooked for life, never quite able to pay off the full balance.
"Call me old-fashioned, but I think credit cards are a terrible idea for kids," she adds.
Credit cards offer immediate gratification, eroding the principles of saving and the validation of paying for an item with money you have earned.
"By saving up for something special, children learn patience and appreciation for what it takes to earn money, and they might just have second thoughts on how they spend it once they have saved it. They might be less likely to make an impulse buy, they way they might be tempted with a credit card in hand," Schnarr says.
There are ways to educate your children on the power of credit so that they avoid the mistakes so many adults have all made.
Go over credit-card bills with your kids every month
"For the reality to sink in, you need the physical effort of going through the bill with your kids," Milley says. "That way, kids realize that twenty dollar-items can suddenly land them with a $1,000 bill. It brings a pretty quick awakening when they have to reconcile that with their bank account.
"I would venture to guess that first two or three bills are going to be bigger than what you hoped and bigger than what your kids intended," he adds. "If they get in the habit of money in and money out, though, a credit card becomes nothing more than a tool."
Avoid buying things (especially for older kids) for no particular reason
"If kids know that to obtain something just means pressuring Mom and Dad until they capitulate, this can spiral into their adulthood," Milley says.
Instead, agree to a cost-sharing arrangement where they must come up with a good portion of the funds in addition to your contribution.
"If this area is not dealt with carefully, you may be paying for things for the rest of your life," he says.
Talk about finances in front of your kids
Don't be afraid to let your children overhear you discuss what's involved in a large purchase, Milley suggests. "It's important that they hear you weighing your options and considering the pros and cons. And let them be with you when you're shopping for the right decision. Just hearing what questions you're asking can be very valuable.
Letting your children see how you interact with money and weigh financial decisions is a powerful tool.
"They do not need to know the specific numbers...but they can understand how it feels and learn what it means to be responsible with money."
Teach your kids how to save
"Children should wait to get a credit card until they have a steady income and have some money saved," Schnarr says. "I've never heard anyone ever say 'I wish I had more credit and started at a younger age.' What I do hear clients say is 'I wish someone would have taught me how to save when I was younger.'"
Kids should aim to save 10 per cent of their income, even if their only source of income is an allowance.
Help kids find ways to earn money
"It could be for work around your home, cleaning, babysitting; the key is that they have to earn their income," Milley says. "Allowances paid without completing a job or project can create unreal expectations."
Remember that financial learning never ends
"The key is to start simple lessons at an early age so that by the time kids need to begin making financial decisions on their own, it won't be quite as scary," Milley says. "If done well, it can also help to keep financial stress in their lives to a minimum."