I have a 13-year-old daughter who loves to shop. I’m on a limited budget, however. How would you have me explain what credit cards are for?
I have two credit cards that I keep on the empty side. One is a Chase Visa, and the other is a Target credit card. I worked hard to get both of them. I filed for bankruptcy when my daughter was a baby, and I got divorced from her father. It was horrible. I never want to do that again, so have carefully re-built my credit. What do you think she should know? Is she too young to know about the bankruptcy? Thanks for your time and advice. – Holly
Your daughter is the ideal age to begin credit class! She likes to hit the mall and buy things, and that means that she’s officially a “consumer.” Now it’s time for her to understand what money and credit are all about. Here are three key lessons to impart:
Lesson 1: The basics of credit
When a child watches a parent swipe plastic without an explanation of what’s happening, the process can seem rather magical. Pick up what appeals, and pay for it all with a credit card. That’s it, right? Hardly.
You must tell her that when you charge, you’re borrowing the money from a bank. If you don’t pay it back in full and on time, the bank will add fees to the remaining balance. Therefore, you’ll be paying more for the items than what was listed on the price tags. To avoid wasting money on those finance charges, you charge only the amount that you’ll repay when the bill arrives.
Also point out that all your charging activity is reported to credit bureaus. This way, other businesses can see how you’ve been borrowing and repaying so they can gauge how good a borrower you are. Use an analogy. It’s similar to the way her teachers have been recording her school performance on report cards — information that colleges will use to determine acceptance.
Lesson 2: Why credit card debt is dangerous
You’ve set the stage with your discussion about what credit is. Now deepen it by teaching about compound interest. Your daughter may have even learned about this mathematical concept in school, but cover it again. Explain that if you were to not pay the entire balance in full each month, the credit issuer would add interest to the remaining sum. If you still haven’t paid off your debt the next month, you’ll also pay interest on the interest charges that were tacked on the previous month.
Additionally, when you owe money on a credit card or other loan and are making payments, you have less cash available for other bills, such as groceries, gas, home expenses and fun activities. Debt is depressing too — which puts you in a bad mood. She doesn’t want that, does she?
Lesson 3: The reason you filed for bankruptcy
You overdid borrowing once and you’re not going to do it again! Absolutely reveal your past mistakes. Talk about what the original problem was, whether it was related to the divorce or because you attempted to soothe your wounds with things. Whatever happened, you owed more than you could repay and discharged the debt in bankruptcy court.
The decision to file was clearly painful. Don’t hide this fact from your daughter. She needs to know that going bankrupt was hard on your credit and emotions and that you’re committed to never going down that path again.
Finally, Holly, be realistic yet positive about these matters. Stress the importance of earning money (eventually doing something she loves), striving for economic independence, sticking to a carefully constructed budget and using credit cards wisely.
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