Tuesday, October 21st 2014

Should You Charge Your Children Interest?

by Brooke Kaelin

Teaching Kids About Credit Card InterestWe’ve all heard it.

“Mom, can I borrow five bucks?”

And we all know that “borrow” means “have” because most children won’t remember tomorrow that they borrowed anything at all from you today.

But what if we did things differently?

Do you think it’s right to charge your child interest when they borrow money from you? Do you ever force them to pay it back?

I wanted to talk with you guys about this today, and see what you thought. At what point, as parents do we step in and teach our child what “borrow” really means? ‘Cause I’m very sure that if we let them grow up, and get out of the house before they learn it, that we’ve failed in an important area.

My daughter’s still young, very young, she’s not yet two. But these types of thoughts are going around in my head, and I want to lay down some plans for how I want to teach her as she grows.

I know that I never had to pay my parents back for anything when I grew up. They never charged me interest on anything I borrowed, or even said anything to me at all if I didn’t pay it back. In fact, we never really talked much about credit, loans, or debt, ever.

So I wanted to turn this topic over to some of the more experienced parents among us.

How do you teach your child about borrowing money? About interest rates? About what a loan really means?

Or, if you’re a future parent, or the parent of a young child (like me), how do you plan to teach your kids about borrowing money?

Is it as simple as “Borrow money? Don’t do it!” or do you have a more complex outlook?

I did a bit of surfing around the internet, to see what kinds of ideas were out there, and I thought there were a few good ones worth sharing:

The Family Education site made a good point about saying no to your child when they ask for a loan:

You can say no and refuse to help. Maybe you’re saying no because you don’t want your child to have the money. Or, maybe you just can’t afford to help.

Either way, it’s an important lesson for your child to learn that, as the Rolling Stones have said, “You can’t always get what you want.”

Hmm, sometimes not getting what you want immediately is a valuable lesson in itself! I definitely know that is something that I want to teach my daughter. In a world where instant credit is so common, I think it’s very worthwhile to emphasize saving instead of borrowing.

An article that I found on Financial Web about kids and credit was actually pretty scary:

Do you know whom the credit card companies really want to reach? Are you aware of whom they really desire to bring into their fold? Well, if you read the title of this article, you already know. It’s your kids, starting with your 12-year-old and up through your college student and young adult. But why would credit card companies want to reach kids when they could focus exclusively on wage-earning adults?

It’s actually quite simple. The credit card professionals know that children are vulnerable, that they’re usually short on cash, and that they’re fairly easy to snare into the minimum-payment lifestyle. Young people are outstanding targets for credit card companies because kids, accustomed to seeing their parents pay with plastic money, have been conditioned to believe that credit debt is simply a natural part of life. These companies also target college attendees because the students are assumed to be relatively safe risks; this is because the companies anticipate that the parents will step in and pay the balances off if the kids can’t do it.

I don’t really know if I believe the credit card companies are “out to get” our children. However, I certainly think they are not averse to taking advantage of the lack of education about credit cards and interest. Both from adults and children.

So far, my basic plan for my daughter looks something like this:

  1. Teach her to save first - I’m really only open to lending her money if it’s a necessity. And since I will take care of her necessities anyway, there should be no real reason to lend her money.
  2. If I do choose to lend her money, I will charge her interest - The longer she takes to pay me back, the more interest will be applied. I mean, that’s the way the world works, and I would rather her know that before she leaves my house.
  3. When she wants to something, I am going to help her work out a simple budget and savings chart - I want her to figure out how long it will take her to something, and decide whether or not it is worth it based off of her time investment.
  4. I plan to her this super cool piggy bank! - It has four chambers, spend, save, invest, charity. I would like to drive those points home as early as possible.

So, how about you? Do you think charging your child interest on a loan is the right thing to do? Please leave me a comment and let me know what you think!

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10 Responses to “Should You Charge Your Children Interest?”

  1. Susan Says:

    Absolutely! My son is 14 and we have been charging each other interest on our loans since he was about 10. Sometimes he’ll have more cash than me and I don’t feel like stopping by the bank, so I’ll borrow from him (and vice versa). Our terms are 0% interest for 1 month, then on the 1st day of the 2nd month, the amount owed DOUBLES (stiff terms). We write each other an IOU for the money we borrow and you can bet we make sure to pay it back well in advance of the month. We’ve each only had to pay the other one interest one time. :)

  2. ConnieB Says:

    Thanks an excellent idea Susan, and it sounds really fun!

    I was wondering about which “terms” I was going to set if I loaned my daughter money – I hadn’t thought of anything like that.

    I am really glad to hear that it is working so well for you and your son too!

    ~Connie

  3. ecards Says:

    I think the idea of being disciplined with your child about paying back the loan is the biggest part of the lesson they can learn and can by itself give them a real world feeling for borrowing.

    Adding the concept of interest on top of disciplined payback – I’m not against this per se, but I think it’s an incremental lesson they learn rather than a fundamental one.

    2 cents,
    lee

  4. ConnieB Says:

    I see your point Lee. The “paying back” part of the lesson is the most important. I think the concept of interest works best with different age groups, but paying back what you borrow works with young children on up and is what you have to teach first.

    Makes sense to me.

    ~Connie

  5. Sara Says:

    Well, I don’t have kids, but I guess I don’t understand why young children would need a loan. (When I saw the title of this article, I thought it was going to be about lending adult children money, e.g., for college.) If your kids want something, they should save up to buy it. I think it’s much more important for kids to learn that lesson.

  6. ConnieB Says:

    Sara,

    I’m really sorry that the article title mislead you! I was wanting to make the point that I intend to teach my daughter about loans, credit cards and interest as early as possible, so that it becomes a part of who she is.

    I think covering the details of loaning money to older children is an excellent idea, thank you. I will do a post specific to that in the future.

    I absolutely agree that younger children should save first rather than take a loan.

  7. Sara Says:

    Don’t worry, I didn’t feel misled by the title, just surprised… I’m not saying that you shouldn’t teach children about the details of lending money, but do you really have to offer a loan as an option in order to do it? I mean, you could explain that, for a $100 item the kid wants, she could save up $10/month for it and buy it for $100 after 10 months, but if she borrowed the money at 20% interest to buy it now and paid it back at $10/month, the same item would cost her $110 and it would take 11 months to pay back… and that’s why it’s much smarter to save up for something in advance. Then maybe saving money in advance instead of buying on credit will become a part of who she is.

  8. ConnieB Says:

    Sara,

    Yes, that’s definitely better advice! I really do believe that saving should be taught to a child first because that will offer them the greater benefit throughout their lives.

    I am thinking that with my daughter, I may use simple savings charts, to help her count down the dates and the amount of time she will need to save up for something. It will help her weigh her purchases first. If she has to save eleven weeks for something, she may think twice about it. Certainly she will think more about it than if I just loaned her the money!

    Thanks!
    Connie

  9. karla (threadbndr) Says:

    My son is 22 and doesn’t have any credit established yet (he’s active duty military and hasn’t ever gotten a credit card). He paid cash for his HS car and sold that one when he left for Iraq, and used part of his oversea’s earnings to pay cash for his current car.

    Therefore, when he needed his very first loan (he keeps a very modest efund, living the barracks), he was declined. I didn’t want to co-sign, so I loaned him the money. We had a written contract and I charged him what the credit union would have charged. He put me on an allottment (auto draft from his pay check).

    When he’s home on leave next, we’ll be heading over to our credit union and getting him a share secured loan or credit card. He needs to start building his credit now.

    When he was younger, I was still in my spend, spend days, but he saw how awful our finances were when his dad died and we were on a strict budget the last year of HS. He knows that credit cards are “teh evil” and only to be used if paid off asap.

    He’s actually told me “The Corps pays me X, I spend x-$100. Because that Murphy dude – he is a Grunt! and he’s always coming ’round.”

  10. Festival of Frugality 11/4 Election Day Edition Says:

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