Piggy Banks and Credit Cards?

Reason Number 5: Why Piggy Banks Don’t Teach Your Kids Money Management

In previous posts, we looked at why piggy banks don’t help your kids learn about money management using ATM cards and debit cards. Now we’re going to look at the 800-pound gorilla in the room, credit cards.

Love ‘em or hate ‘em, credit cards are here to stay. Credit cards offer convenience with one big downside. Credit cards are a springboard to loans that can take forever to pay off.

So how can you help your kids understand the concept of credit cards? Start by accepting the reality that your kids are growing up in a credit card society. No matter what you say, your kids will use credit cards.

Consider these statistics about college students. According to a 2009 study by Sallie Mae, an originator of student college loans, 84% of undergraduates have at least one credit card. Eight-two percent of college students carry balances and incur finance charges each month. Seniors graduate with more than $4,100 in credit-card debt on average.

Your job is to teach your children how to use credit cards wisely before they leave home. Start by educating your kids about what happens when you swipe your credit card. Tell them that you are “borrowing” money. Explain that spending with a credit card creates a bill that has to be paid next month.

To help your kids understand the concept of credit cards, you can use a piggy bank analogy. Explain that a credit card lets you borrow money from someone else’s piggy bank.

That piggy bank lends you money interest free during the grace period, roughly a month. When the grace period ends, and you haven’t paid the full balance by the due date, the piggy bank adds interest to the balance. With credit cards, that annoying interest is added every month until the balance is entirely paid off.

Credit spending is manageable if one treats the money as being spent today. Accountability and planning are the skills required for using credit cards. The danger with a credit card is being able to spend with out being accountable until the bill arrives.

A credit card, in terms of spending, can be compared to a power tool. It can be both convenient and efficient when used carefully, but can create problems when out of control.

If there is one thing you can teach your children about credit cards, it is this, “A credit card is a loan waiting to happen.” When they swipe that first credit card, be sure they know that they are dipping into someone else’s piggy bank.

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