Unless you are committed to avoid using credit in any form, you should educate your children about credit cards and other loans at some point. They won't learn any meaningful information about credit during the typical school day, nor will they normally increase their knowledge base from their friends or family. Understanding how credit works is learned, not innate.
The Right Time
Even if you compare credit cards and evaluate credit card offers regularly, the question of "when" to introduce credit cards to your children is perplexing. Preparing a "show and tell" credit card comparison for a six year old will be a frustrating exercise in futility. Teaching a 25-year old how to compare credit card offers may be too late.
All children mature at different times. Assuming you're not a trained, practicing child psychologist, the best time to introduce the subject of credit and borrowing may be a moving target. One of the major provisions of the recently implemented CARD Act (Credit Card Accountability Responsibility and Disclosure Act of 2009) offers a usable guideline for parents to discuss credit card deals and using borrowed funds wisely.
People between the ages of 18 and 20 can no longer be approved for credit cards unless they have a parent co-sign their account. The only exception: If the young person can prove she makes sufficient income on her own to repay the credit limit requested.
This new regulation may help solve your timing issue. Whether you choose to explain credit card rates and responsibilities or procure one or more low-interest credit cards—with modest credit maximums—as a co-signor for your child, the 18 to 20 year old period might be perfect to introduce credit cards to your kids.
Another option is to add your child as an "authorized user" to one of your accounts. For example, you have a low-interest account that offers credit card rewards. Allowing your child to use this credit card—with your specific permission—might offer real-world experience to reinforce your credit education program for the young person.
This approach, however, lacks one important component of your child introduction program. An authorized user is NOT responsible for repayment, only the account owner (you) is required to make payments. This solution does not reinforce the responsibility of managing credit and budgeting for repayment of outstanding balances.
Timing Is NOT Everything
Introducing young people to credit cards should not be done in a "vacuum". You should include words of wisdom regarding cash and debit cards in your credit discussions. Hopefully, this approach eliminates your explanations becoming a "how high is up," situation.
Using cash and debit cards as a benchmark for your child, the difference in pay as you go and using credit usually becomes clearer. Carefully explaining that cash and debit cards should be used for necessities and immediate purchases can better focus your wisdom regarding credit cards.
Contrasting this explanation with the advice that credit cards should be used for longer term or larger purchases and emergencies should generate a sharper picture in your child's mind.
Using cash and debit cards to compare with credit use helps explain the difference to the teenager in terms they probably understand (cash) helps the young person better comprehend the apparently similar, but very different subject of credit. For even better results, introduce the concept of cash at an earlier age.
The chairman of the American Institute of Certified Public Accountants (AICPA) national financial-literacy commission, Jordan Amin, agrees. "There's a time and a place for all three (cash, debit and credit card)." He and other experts feel that explaining debit and credit cards to very young teenagers is too abstract to take hold in their developing minds.
But introducing the concept of cash and how to use it can be achieved, since younger children have been exposed to cash longer—from the "tooth fairy" to birthday presents of money.
Timing and Proper Information Work Together
Teaching children how to compare credit cards and understanding their proper use and relation to cash at the right time will hopefully make them better users of funds. Using the concept and purpose of cash as a counter point to accessing credit should make them more responsible borrowers and help them realize the obligations that come with credit cards.
Once young people understand the pros and cons of credit cards, you could attempt to explain how to compare credit card offers. During the 18- to 20-year-old period, before they stumble upon trouble with credit cards, you could introduce credit card comparison techniques that relate to balance transfer cards, finding better credit card deals, and choosing the best credit card rates.
