This is a guest post by FPT Guy of Financial Planning Tips – (Twitter: @fptguy) – turning the boring topic of personal financial planning on its head and helping guide you on the financial path that makes sense for you.
Credit cards have always been something I’ve been very skilled at using properly. In fact I wrote a post called “How To Use Credit Cards The Right Way” because I was shocked at how most people aren’t adept at using credit cards; somehow they just think that they’re a form of free money.
Well, actually they are free money for the banks that issue them collecting interest!
I believe in the use of credit cards for their perks and credit score building – IF and ONLY IF – you know how to use them for your personal financial planning. Otherwise you shouldn’t even touch them.
So wouldn’t it be cool to teach your kids this lesson early on? Well I’ve got some ideas about how to do just that. But how can you design it so your child doesn’t go crazy on overspending? I’ve got just the solution for you. Maybe you’ve already figured it out for yourself.
Allowance Replacement with a Credit Card
Assuming you give your child some sort of allowance, have part of their allowance as a balance to be spent on the credit card. So part of it will be cash, and part will be credit they can spend for the month. If they spend more money on their credit card than in cash, the cash that they didn’t spend goes back to you for that month.
Now you’re thinking, well “What’s going to stop Jenny from going crazy and spending all this money on her credit card?”
Answer: since you give them a monthly allowance part in cash, part in credit (say half cash, half credit) – there still is a maximum monthly allowance. If they go over this monthly maximum – combined cash and credit – then that will cut into their next month’s allowance. This potentially could zero out their next month’s allowance if they overspend, but that’s the brakes. But when that happens you can take the card away – up to you.
So what real incentive does your kid have for using the card, other than the credit card looking like a status symbol, which may be enough already.
Let Your Kids Accrue the Rewards Points They Spent
Giving your kids the rewards points they used as a great way to give them incentive to use the card. However they can only get points up to their monthly allowance – if they go over for the month those points can’t be allowed. And of course the rule still applies that it’s deducted from their next month’s allowance. Use them correctly, and you will be rewarded – give them the rewards points that they spent with it, but only up to their allowance.
Teaching Your Children to Keep Track of What They Bought
Credit card billing statements are fantastic ledgers of what has been spent. This is a great lesson for the kiddos in how credit cards can make it easy to track expenses. Teach them to categorize them as well so when they get old enough to file taxes, they’ll already be familiar with expense categorization. Better yet, if they have that entrepreneurial spirit, this is something they definitely need to learn. Learning these habits they’ll be much less likely to worry about getting rejected for a credit card application and can get any easy to get credit cards they want.
More Incentive: Give Your Kids a “Cash Bonus”
If for six months your kids don’t overspend on their cards, give them an extra cash bonus for that month.
HINT: Don’t Use A Prepaid Card
Some may ask “why not use a prepaid card? That will just be easier to control my kids’ spending”. Prepaid Cards are good if you need it for your child to have emergency cash on hand, but in the “adult sense” they generally are for people with spending problems. The point here is to teach your children how to use a credit card the right way. So I think it’s better that you don’t start your kids off with a card that cuts them off and that they have to prepay. It’s teaching the wrong mindset. You want them to be aware of what their spending and learn how to be responsible with it.