Finance Lessons With Kids: What About Those Cards?

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What Again Is A Credit Card?

We had an interesting topic in our little homeschool today. We were casually talking about salary and groceries then the question about credit cards was raised by my eldest. Knowing how important the topic is I eagerly obliged as it presented opportunities to discuss many things related to finances.

First I had to define the different cards that we use when we purchase. There is the debit card and then the credit card.

Debit Card is related to your bank account, meaning the amount of the money you can spend using a debit card can only be as much as the balance available in the bank account. There are many ways to keep track of the current account balance but mostly, the bank sends a real-time SMS each time you use the card. I showed him the recent SMS I had from my bank and his eyes widened. Yes son, only that much is left. Lol.

A credit card is a facility extended by a bank wherein they lend you a certain amount that you can spend using the card they issued. In return, you have to payback the amount spent and in addition to interest and other charges. ⚠️Alert❗: credit cards could be very bad if used irrresponsibly.

Percentages : Revision

Speaking of interests and charges, it led to an opportunity to review on percentages.

We talked about the charges the bank may charge when using a credit card facility. There are finance charges and in some instances, late payment fee as well. I gave him simple examples on how the banks levy these charges.

Imagine the bank issued me a credit card with a credit limit of Dhs 20,000. That means I can spend that amount but the money is not really mine. The bank is just lending me that amount and I need to pay it back before a particular date.

Ideally, I have to pay the full amount I spent on or before the due date but the bank can tell me that I can pay a minimum amount which is a percentage of the full amount. If I choose not to pay the full amount, then the bank will charge extra.

The Credit Card Catastrophe

Now, imagine I do not pay the full amount I owe the bank but instead I only pay the minimum each month. On top of that, I also keep on using the card.

... Calculating…

And what if, for some reason I forgot to pay on the due date? The bank adds a late payment fee.

... Calculating…

The numbers simply blew up!

Soon enough he saw the bigger picture of how credit cards can impact one's life.

"Nah, I wouldn't want a credit card."

Do Not Spend Beyond Your Means

"No, credit cards are not entirely bad," I explained. "You just have to be responsible in using it."

After a few more examples, both real life and those that were featured in the papers and articles, I let him digest the information.

Later he came up with with his "solution".

"Mommy, I think I know what I should do so that credit cards won't be that bad for me," he said.

"I just need to spend from my card how much I can pay with my salary."

Budget and Savings

So now comes the reminder about savings and budgeting.

"Yes, but you need to have a budget, a system on which you will save and spend your income."

Income - Savings = Expenses, not Income - Expenses = Savings

I reminded him the importance of savings-- take out a portion of your income as savings first, and then budget the rest for the expenses.

Source

Financial Literacy

One is never too young to learn about savings, debt, budgeting and other financial tools. Some may seem complex but knowing our children, we'd know how and when to introduce such topics to them.

It may simply be saving for that toy they really wanted, or looking at the price tags when shopping, checking for the lowest possible price. Of course, there is setting an example of good financial habits and letting them learn from our own mistakes as well.

I saw how interested my son was in today's lesson and I hope it had been enriching and enlightening to him. For sure this won't be the last for this topic, but instead we'd make this a recurring one.


Cover Image Credits: blickpixel and jarmoluk on Pixabay.

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