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Teaching Kids About Credit

Posted on February 16th, 2012 by Alley Pezanoski-Browne 1 Comment

By Elise Bell

If you watch television for more than five minutes, you would probably see a commercial for a credit card where you will get 1%, 2% or 5% back on purchases. People that don’t understand credit would say “Great! I like cash back!” People that know the truth about credit also know that the interest rate on these credit cards can be up to 29%. Thus, saving 1% or 5% is very minimal in terms of the overall interest rate. You will still be paying on the card for many years especially if you only pay the minimum payment each month. The credit card company is still making a ridiculous profit off of you despite the amount of “cash back” they give back.

Kids need to know about how credit works so they won’t get roped into the “cash back” and similar offers touted by the credit card companies. According to the article Teach Your kids about Credit Cards, “when it comes to credit cards, you need to make sure that your children understand that the money isn’t ‘theirs’. It’s borrowed and it has to be paid back with interest if the balance is not paid off each month.”

Courtesy of _Dinkel_ (via Flickr)

The article further suggests that you play a credit card game with your kids wherein you allow them to borrow $20 on credit. You will explain to them that they will need to pay you a total of $22 at the end of the loan term. By playing this game, the kids will learn the concept of interest.

It’s even better to teach kids how to live virtually cash only and how to use credit sparingly. Equally important, kids need to understand the value of a dollar and why they should focus on saving instead of spending. It should be explained to them that having debt is like being a slave because you are constantly under the thumb of a watchful creditor.

According to the article How to Stay Out of Debt by Living Cash Only, “millions of dollars a year are spent on interest alone from credit debts. By living cash only, you keep that money in your own pocket and learn the value of a dollar – not to mention learning some great skills for saving money.”

The next time your kid asks for a new toy stress to them that they need to save their own cash in order to buy it. Let them know by doing so, they are making a wise decision and helping to put a credit card company out of business.

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One Response

  1. squidward says:

    I would take our community and fix them. I would also fix our economic problems.