“Dear Ross: As a parent of an otherwise wonderful and responsible 18 year old daughter, I am struggling how best to deal with the fact that she has already run up a $750 balance on her first credit card, and she has only had it six months. The interest rate is 19.5%, and they are also charging her some nonsense balance protection insurance each month. Should I stay silent? Should I bail her out? Help?”
Good questions, Shannon – in your email you also mentioned she is wrapping up a “victory lap” in Grade 12, and has a good part time job making a few hundred dollars every couple of weeks.
You said she has recently been depositing her entire biweekly pay check into her Visa, but then continues to use the card as expenses arise. In that sense, she is treating the card like a ve ry expensive debit card – since there are many small cash advances taken from the card – each with stomach turning fees. Example, a $20 advance from an ATM renders a fee of $1.50 from the ATM, plus a $2.50 service charge from her Visa.
So each $20 is costing her $24 right off the bat – and then there is the monthly interest on top of that. At this point, until she pays the balance down to zero, every transaction will incur interest from day one.
It is a sad fact that little formal effort is put into providing our children with a useful education in managing money and finance matters. Trial and error (mostly errors) seems to be the way to go. The school system could and should implement a mandatory course – just as they do for Civics and Career Planning, to help our teenagers prepare for financial independence.
But ideally, the education process should begin at a much earlier age – when they are in our care and we have their undivided attention and respect. All parents know we begin to lose that around the age of twelve or so (sigh)
How can I help my child manage their first credit card responsibly?
Work out an agreement with your daughter which begins with you paying the entire balance in full; transferring her obligation from Visa to you. You may (or may not) charge interest, but if you do, keep it modest – like around 2%. The point is not to make money at her expense, but rather to ensure she is always aware there is a cost of money borrowed.
Next, agree on a repayment plan. Seems to me if she gives you several post dated checks for $150, coincident with her paycheck dates, the balance can be repaid in less than five months.
This leaves her money to spend on an ongoing basis – either by cash spending or by intelligent use of her bank debit card (not incurring any service charges)
During the repayment period, you should gently insist she not use her Visa at all.
During the next few months, use the time as an opportunity to teach her about proper credit card usage, money management, budgeting etc. You want to make sure this is not a recurring problem.
Oh, and you might get her to cancel the balance protection insurance – I’m not a big fan of this product, and in any event it’s unclear it would be of benefit to a high school student working a part time job.
On the plus side, she has recognized relatively early that she is in a spot of trouble here, and she felt comfortable enough in her relationship with you to confide her problem and seek your help – good for you!
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Ross Taylor is recognized by his peers as one of Canada's pre-eminent difficult mortgage specialists. His ASKROSS blog and column in Canadian Mortgage Trends are focused on the intersection between mortgage financing and personal credit.
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