Parents, when your children turned 16, did you just toss them the keys to the family car and hope everything would work out for the best?
Probably not, right?
Instead, I'll bet there were hours of driver's education and countless miles of quality time co-piloting your prospective drivers before they went solo -- all in the interest of safety. As parents, we're generally pretty good at developing this skill in our children.
Unfortunately though, we're not so good at teaching them another skill necessary to keep them safe, this time in a financial way: How to manage credit and stay out of debt.
To help fill this glaring educational gap, here's an outline of a parent-taught course on credit cards that I urge you to share with your children before it's too late.
Here's what they need to know:
Being reckless is dangerous. Of course this is true for driving a car, but for using credit cards? OK, maybe it's different, but the danger is there. Money problems can affect jobs, relationships and even a person's physical well-being. Let's face it: Being reckless with credit cards can be the first step in the wrong direction that ultimately finds you buried in debt.
So, we need to be extremely careful with how we use credit cards. A young person's goal with plastic should be to establish credit, gain additional purchase protection and maybe earn some free perks. Never should the goal be to buy things they can't afford or to live beyond their means. Little debts can quickly become big debts, and big debts can quickly run you off the road to financial security.
Some things take a long time to fix. Wreck your car, and you can typically have it repaired within weeks. Wreck your credit, and it can take years to fix. Banks and credit card companies aren't nearly as forgiving as mom or dad if the payment doesn't show up when it's supposed to. What's more, they keep track of our debt repayment behaviors and even grade us through a measurement tool known as a credit score. All things being equal, if you consistently make your payments on time, your score will go up. Make your payments late, and your score will go down.
Why is that important? Many reasons, but here's one of the biggest: Those of us with the highest credit scores get offered the lowest interest rates when we need to borrow money. Lower rates mean smaller payments and less interest, and that equates to keeping more of our money for saving, investing or spending however we see fit.
Don't take on more than you can handle. My kids won't be driving anytime soon, but when they start, I can assure you they won't be getting behind the wheel of some 400-horsepower fighter jet on wheels. Too much of anything can cause problems, and credit card use is no exception. The higher one's borrowing limit, the more problems that can cause, so it's important not to overdo it.
Remember, when you carry a balance on a credit card, you have to pay interest -- interest that effectively increases the cost of what you charged. And while paying interest will sometimes be unavoidable, those instances should be the exception rather than the rule. The goal should always be to try to keep interest costs to a minimum by not charging more than we can pay off when the bill comes.
Sometimes cheaper is better. "You get what you pay for" may occasionally be true when it comes to cars (though that's definitely debatable), but rarely is that statement true regarding credit cards. If you have to use one, a credit card with a lower interest rate and low-to-no fees beats a high-rate, high-fee card any day. It's bad enough to incur the extra costs associated with a credit card. You certainly don't want to make it worse by paying more if you don't have to.
In many ways, credit cards are like cars. They're very helpful in our society, they can give you great freedom and they can provide you with a sense of security. But they can also do a lot of damage if not handled properly. So don't just turn your kids loose and hope everything works out OK. Give them the training they need to safely navigate the potentially dangerous world of credit card management.