Credit Card Discussions for Kids

• Discussing credit cards with your kids helps them understand how credit works and better know how to manage credit responsibly in the future. Managing credit well is an essential skill for young adults who need to build a good credit score for getting loans in the future. Your child's irresponsible credit card use can damage your credit rating as well if you are a co-signer on the account.

Borrowing Money

• Teach kids that credit cards are not free money. Rather, they are a way to borrow money from a lender, and the borrowed money must be repaid with interest. Kids should think of credit cards not as a way to buy something they do not have enough money for, but rather as a way to pay for something slowly over time --- and, unfortunately, to end up paying more for it than they would have if using cash.

Interest

• Use math lessons to discuss the effects of interest in relationship to credit cards. Math textbooks often present interest in the situation of earning a return on savings, but explain to your child that interest also applies to debts. Kids need to understand that credit card companies earn money by charging interest on the amounts borrowed on the credit card. Show your child how to calculate monthly interest charges by dividing the annual interest rate by 12, dividing it by 100 to convert it to a decimal and multiplying it by the credit card balance. For example, calculate the interest on a credit card with a $3,000 balance and 18 percent APR by multiplying $3,000 by 0.015 to get $45. This is $45 per month that could be spent on consumer goods if there were no credit card balance.

Minimum Payments

• Explain that paying only the minimum due on a credit account is the worst choice. When a credit card bill comes, the minimum payment is the most prominently featured amount, leading kids to believe that they should only pay the minimum payment. Explain to your kids that paying only the minimum means most of the payment goes toward interest and only a little pays off the money borrowed. Teach your child to pay the whole credit card balance every month and to only pay less than that in an emergency.

Credit Scores

• Explain to your child that credit card information such as the credit limit, recent account balances and payment history all appear on a person's credit report. The credit report is used to generate a credit score and lenders look at the credit score to help decide whether to offer a loan and what interest rate to charge. To drive the message home, use an online mortgage calculator to find out the difference in monthly payments with interest rates 1 percent apart from one another. Kids need to understand that using credit well now can help save thousands of dollars in the future.