Want to help your kids understand why people get in trouble with credit cards?
Show them your latest monthly statement from the holidays — the terminology, the interest costs and the line after line of charges for every time you took the plastic out to pay for gasoline, holiday gifts, medical bills and tickets to the movies.
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Recent financial reforms have made it a lot easier to review your credit card bill than it used to be. Financial institutions are required, among other things, to include a chart on your bill that displays how much you’d pay in interest if you only paid the minimum each month.
Ideally, while your teen is still living in the cash-and-carry world, sit with him or her and go over your credit card bill.
Take it from the top. Explain how the credit card industry works — define the terms and explain how buying something on credit is really just a short-term loan with a very high interest rate that will be charged on every dollar you don’t pay off by the due date.
This is where you show your teen the minimum payment information on the statement and emphasize that it only makes sense to pay the bill in full every month to avoid interest charges or late fees.
I came across an interesting decade-old study from the Massachusetts Institute of Technology showing that people were frequently willing to pay twice as much for an item being sold at an auction when they used a credit card instead of cash — the point being that when you can’t see the money, it’s easier to be carefree with it, even as the stakes become higher.
But don’t scare your teen into believing that credit cards should be avoided at all costs. After all, the world revolves around paying with plastic.
The trick is to use credit cards responsibly.
One of my rules of thumb is to never use plastic to buy anything that will be consumed before you get the monthly statement. Along those lines, share some of your personal experiences on how the overuse of credit cards has hurt you or caused embarrassment.
I’m reminded of the time my father cut up my credit card after I had graduated from college and gone on a spending spree of dinners and gifts. Since it was a joint account, it was made clear that I was now expected to apply for my own card and pay my bills.
I also recommend going over the final amount and all the charge information in the event there are errors. With credit card fraud running rampant, keep your sales receipts and double-check them against the charges on your statement.
In my December statement, I noticed a suspicious $100 charge from a fitness website. I reported this to my bank, which immediately canceled my card and issued me a new one.
While reviewing your statement, go online and check your credit reports. You’re entitled to a free report every year from each of the three main credit bureaus — TransUnion, Equifax and Experian. Go to www.annualcreditreport.com to sign up.
After all is said and done, you might have to acknowledge to your teen that your spending has gotten out of control. That might lead to a lesson on how to get out of trouble.