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By Gail Vaz-Oxlade -

Life in plastic? It’s fantastic if your kid first understands how credit works.

As a society, we’re no damn good at handling credit. Since it’s only a matter of time until someone comes and waves a credit card under your kids’ noses and says, “Try it, you’ll like it,” your job is to make sure they’re prepared to deal with credit smartly.

Can you imagine walking into a bank and saying:
--“’Excuse me, but I don’t have a job, I’ve never had credit, may I have a credit card, please?”
They’d laugh uproariously at your impudence.
Yet every year lenders hand out thousands of credit cards to unsuspecting students who have no visible means of repayment and don’t understand the impact of failing Credit Management 101.

Want to change that for your children?
As early as 10, start teaching your children how credit works, when to use it, and how to spend only what they can afford.

Issue your child a credit card on the Bank of Mom & Dad.
Have Sonny Boy design the card and draw up a cardholder’s agreement that you both sign.
In the agreement, lay down the rules:
  • How much credit he can use (the “credit limit”),
  • when his statement will arrive,
  • how much time he has to pay (the “grace period”),
  • and the minimum payment required.
Most importantly, describe with examples how much interest your child will have to pay on any balance outstanding.

The point of the exercise is to help kids to learn the reality of credit use.

Lesson #1:
When you use someone else’s money to buy stuff, that stuff costs more. You must charge interest.

Don’t come hissing and spitting at me with terms like “usury” and “profit.” I’m not suggesting you build your retirement plan from your child’s borrowing.
If you want children to experience the true impact of using someone else’s money to meet their spending needs then interest must be a part of the equation.

If you teach them it costs nothing more to acquire that scooter than the ticket price, are you really preparing them for the credit cards and personal lines of credit that are in their futures?

How much interest is enough?
I suggest you go with 28 per cent a year -like a store card - otherwise the interest is not significant enough for them to feel the pinch and learn the lesson.

Now Sonny Boy can use his credit card when he sees something he wants to buy, but doesn’t have any money. He gives you his credit card. You make the purchase on his behalf. You give him a charge slip to sign (a receipt book will do nicely for this). And you return his card and charge slip.

At billing time, you total his charges and present him with a bill that shows the minimum payment and the total outstanding balance.
In a perfect world he pays you back in full. More likely, he makes a partial payment and carries a balance and you’re in the business of calculating interest.

If you’re giving an allowance from time to time, you may be hit up for an advance. This is another opportunity to teach about borrowing. Make sure to charge Baby Doll interest on the advance.

What if Baby Doll won’t repay the advance?

Time for Lesson #2:
Inconsistent repayment affects your ability to borrow in the future.

Tell her that before you give her another loan, she must offer you some form of collateral. It may be her bike, her telephone or her iPad.
Make up a loan agreement and include a paragraph that clearly spells out that if the loan is not repaid on time, you have the right to take whatever collateral she has given you until the loan is repaid.

If Baby Doll consistently slips off the repayment path, you could withhold a part of her allowance and apply that to the repayment of the loan (like having your wages “garnished”). But then you are removing the responsibility for making the repayment from your child.
A better lesson would be to insist upon repayment as soon as you have given the allowance.
Create a chart showing how much she owes. Each week, reduce the amount owed so she can see her progress in repaying the loan.

A child who does not repay a loan on time needs to see the consequence of a bad credit history: No more loans.

And the child who is constantly borrowing may benefit from having a loan request declined to teach how constant borrowing reduces her ability to repay (and therefore qualify for) yet another loan.

Want to be smarter about your money?

Go to and follow the roadmap to success.

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