Parents have the responsibility of teaching their children about various aspects of life; financial literacy is one of them. Credit cards are an integral part of life today, their usage offers a lot of convenience but using credit cards responsibly is very important. Their usage impacts the credit score and also the various financial aspects about an individual. Here are a few things that you should tell your child about their credit card and its usage.
The Amount Used is Borrowed and needs to be Repaid:
This is the most important and basic aspect that needs to be explained to the children. They need to be told that whenever we use a card, the amount is like a loan and needs to be repaid within the given time frame else there are consequences for not doing that. This will ensure that they use only an amount equivalent to what they can repay and do not struggle at the end of the month to pay the credit card bill.
Credit Cards Come With a Limit:
Each credit card is issued with a credit limit. This is the maximum amount that can be spent by the user without repaying the old dues. It is important to let the child know that the limit for the credit cards is for a reason and the user must respect this limit. It important to let the user know that the spending must ideally be less that 30% of the sanctioned limit; spending more that reveals credit hungry behavior and over dependence on credit cards. Exceeding the limit comes with a cost.
Delays In Payment Are Costly:
Payments for credit cards have to be made by the given due date or before that. If the payment is not made on time or a payment is missed then there are negative consequences for the user. Delayed payments attract late payment penalty while missed payments attract both a late payment penalty and interest on the overdue amount for the delayed period too. This impacts the credit score negatively too, frequent delays in payments and missing them could harm the credit rating to a great extent.
Your Decisions Have a Long Lasting Impact:
This is one of the most important factors that needs to be understood by all card user especially youngsters who start using cards for the first time. They need to know that whatever decisions they take regarding their credit cards, those decisions will have a long term impact on their credit health and financial health too. If they miss payments, it will be reported in the credit report and will reflect in it for 36 months. Even if they decide to surrender a card, the delay in payments will still continue to reflect in the CIR for the stipulated time frame. If overdependence on credit cards results in the user falling in a debt trap it can be difficult to get out of it. Unpaid credit card bills attract penalty and interest which keeps on adding to the debt burden. This results in additional financial burden apart from the already overdue amount and also impacts the overall credit rating
Follow Basic Guidelines for Using Cards Safely:
Another important aspect related to card usage is regarding its safety. Whenever the user uses his/her card they must follow the basic guidelines related to it. When using it physically ensure that you take the card back and keep it safely, do not let the card out of sight when it is being swiped, do not share the PIN number and preferably use a card that has the user’s photograph on it. If the card is being used online then use it on secure websites and do not store your details on websites.
Just like you teach your child about all aspects of life, make sure you make them aware about the right way to use the credit card too.