The thought of kicking off your child’s journey on plastic may sound horrifying, but there are strong arguments on both sides of this debate.
In some respects, handing over the plastic to your child implies to your kids that it is fine to use a credit card. It could give them a license to splurge and could send them down a path of financial recklessness.
If the kids do create a mountain of debt, the parents’ or kids’ credit history could be tarnished – depending on who is obliged to make the repayments.
Peter Switzer, founder of the Switzer Super Report, says there’s no need for a child to have a credit card.
“If you want your child to access funds, why not allow them to use a debit card? You can set a limit and create a contract with your kid to manage their spending responsibly.”
Switzer says parents can teach their children about using credit, through leading by example and being honest about their own relationship with money.
“Parents are normally embarrassed about their finances, which is why money is rarely talked about in the family.”
What parents can do is discuss the impact of being unable to pay off a credit card debt – the embarrassment, the poor credit rating and the difficulty of taking out a home loan later in life.
Switzer also recommends parents should highlight other positive ways money can be used, such as the returns that come from making personal contributions to a super fund.
If they’re heading for the plastic…
Those who support the idea of giving children a credit card argue it’s a way for kids to develop financial responsibility and start building a positive credit history.
However, as soon as your child turns 18, you might find that you have very little say in the matter of your child’s credit card application. So what wise words of advice can you give them?
• The credit card doesn’t need to be swiped every time you go to the register; smaller purchases can usually be made with cash
• Make your payments several days ahead of the repayment date to allow time for your payments to be processed
• Use comparison sites to find the lowest-rate cards on the market before applying for any
• Move any hefty credit card debt to a balance-transfer card that gives you an interest-free period of at least six months
• Although the credit card reforms haven’t kicked in yet, credit card providers can still make offers to raise customer’s credit limit. Kids should resist these offers as it could lead to overspending
• Switzer recommends “blowing up” the text of the fine print of the terms and conditions, so your children can clearly identify all the penalty fees.
-- By Stephanie Hanna
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