A Seven Year Old Learns About Credit Cards

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Here’s some food for thought for those of you out there raising children and hoping to teach them good lessons about money.

I was at the store recently with my seven year old son. When it’s just the two of us, he’s very quiet and observant of what’s going on around him (he can be quite a bit less so when he’s with a friend or with younger siblings).

Anyway, he watched very carefully as I paid for the groceries with a credit card. I swiped the card, signed the signature pad, and got my receipt from the cashier, and he watched this all with interest.

As we were walking out together, I asked him whether he realized that I had just spent a decent amount of money on groceries. He shook his head yes. I then asked him where the money came from. He said, rather astutely, that the money was stored on my credit card. “So,” I said, “do you think that Mom and I sometimes go to the bank and have money put on the card?” He thought about that for a moment and then said, “Sure.”

I smiled and told him that, actually, the bank was lending us money every time I used the card. “Whenever I swipe the card, bud, our bank is telling the store that they’re covering whatever we spend. Then, later on, I have to pay the bank back for whatever I spent. Now… why do you think the bank would do that? Remember… every business is out there trying to make money.”

He thought about this for a little bit, then said he didn’t know.

If I don’t pay the bank back very quickly, they start charging me more money. So, if I borrow $100 for groceries using that credit card and I don’t pay it back in a week or so, I’m going to owe the bank $110 or so. If I don’t pay it back after that, it’ll keep going up and up and up. I only spent $100, but if I don’t pay it back quick, I’m going to be paying the bank a lot more than $100.”

His eyes got big. “So you want to pay it back fast!”

I smiled at him. “Absolutely.”

For most of the ride home, he didn’t say anything at all. I glanced at him in the rear view mirror and he seemed to just be looking out the window.

As soon as I pulled into the driveway, he asked me another question. “Are you going to go inside and pay off that credit card right now?”

I told him that I could do that, but that I usually just pay off the whole balance every few weeks, before I get charged any interest. I just make sure that I pay off my full balance before any interest is charged.

A cute story, right? Well, here’s where it gets interesting.

This morning, I turned the calendar page in our kitchen to the next month. The first thing out of my son’s mouth? “Is it time for you to pay that credit card now?”

I have a few thoughts on this.

One, the credit card industry would collapse if every American understood credit cards as well as my seven year old. He doesn’t see any point in paying the banks a dime of credit card interest – and I don’t, either. He understands that using a credit card directly means that you’re borrowing money from a bank and that the sooner you pay that all back, the better off you are.

Two, you can teach good personal finance practices to young children. They want to understand how the adult world works and they absorb information and ideas at a very fast rate. If you just explain things piece by piece, they’ll understand it. If you explain good personal finance habits bit by bit, they’ll understand it.

Three, when they do understand the ideas, they watch how you behave. You need to live up to the standards you explain to your children or else those standards won’t mean much to them. You can teach a child all of the ideas you want, but if you don’t actually follow through on those things in how you live your life, those lessons won’t hold much weight. After all, why should a child be smart about their money if their parent obviously doesn’t care?

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