My child needs a credit card? Yes I can almost hear you now, but there is a method to my madness so read on!
You may have seen one of my previous blogs – Pocket Money Management – which touched on the need for financial education in children.
It is something that I have long advocated and extremely passionate about.
I have always found it strange financial education is never taught to us when we’re younger.
It is something that is certainly not going to be offered by the education system any time soon, unless you are lucky enough to go to one of the top private schools anyway.
But is it really the school’s job or the parent’s?
We live in a world of easily obtainable credit, yet we leave school without the necessary education to be able to manage it properly. I want you to ask yourself this question;
“Would you throw your child into the middle of the deep end of a swimming pool without teaching them to swim first?”
Now I’m guessing, or rather hoping, that you all answered no to that question.
So why would you send your offspring out into the world without any clue about personal finance? Especially in an age where a huge amount of 18-25 year olds are already overly indebted?
This is why children need a credit card now!
No, I’ve not lost my mind (if that’s what you are thinking) and I’m going to explain how and why it should be done.
Children’s Credit Card Concept
As the parent you are the credit provider in this scenario, with your child/children being the debtor. You give them their own card to use with £40 “credit” loaded onto it. How they spend it, and how quick, is up to them. It is not free money they have been given, it is a short term borrowing facility – it is crucial to remember this so they learn to manage it properly.
How it works
Apply for a prepaid card as there are no credit checks and no negative imprints on your credit file by doing so. Add your child as an additional card holder to the account – they must be over 13 years of age – with the card in their name it will make the credit card concept seem much more real.
Now, top up the card with £40 credit. The money is your childs to spend however they wish – within reason!
Continue to give them their pocket money as usual. For this example let’s say they receive £10 per week.
The card comes with a 10% interest charge at the end of the month on any balance still outstanding. So, if they have spent the full £40 balance by the end of the first month and have not cleared their balance, they owe you £4 in interest charges from their first weeks pocket money the following month. Leaving them with £6 pocket money and the £40 outstanding balance is still owed.
If they have been frivolous with their spending and have not been sensible enough to pay it back they are already £4 out of pocket. 1st lesson about using and paying credit back wisely learned!
If they continued to dodge paying the money back over the whole year it would cost them £48 in interest charges, plus the £40 they originally borrowed.
Advise on how to clear their balance
So they’ve blew the money straight away and you’ve already had the talk about deducting £4 interest charges from their pocket money. Now you must help them to form a plan to pay back the money and manage their debt properly and avoid continually racking up more interest charges.
Let’s say they agree to pay back £5 a week for the next 4 weeks, the balance is down to £20 and the interest charge is now only £2. If they repeated the same the following 4 weeks they are back in the black and the balance is there for them to use again, if they so wish.
Track their spending
As the account holder you will have access to internet banking and be able to see how they have been spending their money. If you can see they have been frittering it away on sweets and chocolate, or something else not really needed then advise them to use their pocket money for this, not their credit card.
Explain it should be used for emergencies or maybe a needed, expensive purchase where spreading the cost is the only option to be able to buy it. The more you educate them on their spending habits the less likely they are to continually blow their entire credit limit on rubbish every month. It will give them an understanding of how a credit card should be used responsibly.
If they have been withdrawing money from the machine the prepaid card will charge them 75p, a bit like a credit card does. Explain to them it’s dead money and the need to use it to purchase and not withdraw money with. Dead money that’s coming out of their “hard earned” pocket money!
Always advise them to clear the outstanding balance as quickly as possible to avoid racking up more and more interest charges.
Monitor their spending progress
If you notice as the months go on that they are now spending responsibly, keeping up with their repayments and clearing their credit balance regularly, you may want to increase their limit as a reward.
This will help them to understand how credit ratings work. If they are a sensible borrower and can prove they will not act reckless with credit then they are able to apply for more credit. This is how it works in real life!
They are ready for the real thing
After using their own “Child Credit Card” for a few years your child should now be ready for the real thing when the time comes. They will have an understanding of how they work, the importance of clearing your balance regularly and not letting the debt spiral out of control.
If we were all taught this from a much younger age there wouldn’t be half as many people in debt as there are now. Get them educated and prepared for the next stage of their lives. Far too many 18-25 year olds are over indebted, from that point on it is a slippery slope to a debt solution. Prevention is better than cure!
If you fancy giving this a go with your children I would recommend ICOUNT Money as the prepaid card provider.
He is also a contributor to Clear Debt, ICOUNT Money and M1 Debt Advice blogs discussing all things personal finance.