By Sheryl Smolkin
Read this article and comments at Moneyville.ca
When each of my children got their Ontario G2 driver’s licence and were able to drive alone, my husband and I decided they were old enough to have a credit card.
The primary reason was our concern about their safety. They rarely carried more than $20 cash and that wouldn’t go very far if the car ran out of gas or they had an accident.
Because we each had a personal credit card in addition to the card we use jointly for most family purchases, the simplest thing was to get my daughter another card on my account and one for my son on my husband’s account.
The cards were meant to be used only in an emergency, and on the rare occasion where one of the kids used them for something else they asked first and promptly paid us back if they had agreed to do so. We never worried that they would abuse our trust because we check our accounts very frequently on line, and if a problem did arise, we knew we could nip it in the bud pretty quickly.
However, I can understand that some parents may be concerned that their children might run up large bills for unnecessary items or be susceptible to peer pressure when they are out with a group.
If you are not comfortable with giving your child their own card or a card on your existing account, another option is a reloadable prepaid card. However, before going ahead, carefully check out the sign up and monthly maintenance fees for this type of account. And keep in mind that these cards typically do not involve any credit reporting, so they will not help your teenager build a credit history.
Secured credit cards are also available. They allow you to put down a deposit at the bank that secures the balance. Your child can’t exceed a preset limit and he will begin to build a credit history. But you will have to co-sign, so monitor the card closely.
Whatever type of card you select, here are some ways you can educate your offspring so they will use their new privileges wisely:
Interest mounts up: Do the math together. For example, my CIBC Infinite VISA card charges interest at 19.99 per cent a year or .05476 a day. Compare that to the .5 per cent annual Advantage for Youth Interest Rate CIBC is currently paying on its Premium Growth Accounts!
Pay bills in full: Be a good example. Avoid paying interest by paying your bills in full. Make it clear that anyone who can’t afford to pay off credit card bills each month can’t afford the items charged to the card.
The credit limit is irrelevant: Set personal spending limits. Just because a card has a credit limit of $1,000 or $20,000 doesn’t mean a cardholder should charge to the max. Unless your child is spending for budgeted items and will have cash on the due date, tell him to forget it until he has saved up the money.
Break the rules, forfeit the card: Be clear about the rules of engagement. Make sure your teenager knows if overspends, or uses the card for unauthorized purposes, it will be cancelled. No ifs, ands or buts.
Understanding how credit cards work and learning to use them properly is an important part of your children’s financial education. By helping them to understand the potential pitfalls of buying on credit when they are still living at home, you may save them a great deal of grief later on when they leave the nest and fly solo.