Is Your Teenager Ready For A Credit Card?

MANILA, Philippines - Question: My teenage son is asking me to give him an extension credit card. What should I consider before granting his request? – Generous Dad via text message

Answer: It’s a good thing that you’re pausing before you give in to your teenager’s request for an extension credit card. You are not just being generous in the material sense but also in trying to instill the right money values in your child.

Here are the things you may want to answer:

1. Why is he asking for a credit card? I assume that he is still in school and does not yet hold a regular job or have any steady source of income. Is he studying away from home?
2. How are your son’s spending habits? Is he frugal and responsible enough to hold that mighty plastic?

A bit of History

Before we proceed any further, I wish to share with you how that mighty plastic came about. In fact, at first it was not plastic but paper.

According to Jennifer Rosenberg, a 20th Century History Guide of About.com, one day in 1949 Frank X. McNamara (head of the Hamilton Credit Corporation) went out to eat with Alfred Bloomingdale (grandson of the founder of the Bloomingdale's Store) and Ralph Sneider (McNamara's attorney). The three men were eating at a famous New York restaurant to discuss a problem of McNamara’s client. The client’s problem originated when he lent his charge cards to his poorer neighbors in need of basic items for emergency. Unfortunately, his neighbors were unable to pay him on time and he had to borrow money from McNamara’s company to pay his neighbors’ charges on his cards.

At the end of their meeting, McNamara reached for his wallet to pay for the meal. He was shocked to discover that he had forgotten his wallet. To his embarrassment, he had to call his wife and have her bring him some money. McNamara vowed never to let this happen again.

At that time several companies were already offering their respective charge cards but one card could only be used in one shop. Thus, a shopper needed to bring several cards even for just one day of shopping and dining. McNamara, together with Bloomingdale and Sneider, came up with the idea of a single card that will be honored by different establishments. Since their first target customers were the salesmen who dined with their clients in different restaurants, they named their company Diner’s Club, the issuer of the first multi-establishment credit card in 1950.

The advantages of credit card

The credit card is a financial invention that’s supposed to make life easier for consumers and the merchants.

Here are some advantages to the consumer:

1. You don’t have to carry a lot of cash.
2. You enjoy a float as long as you pay your bill on time and in full. (Float is the amount of time between the date you charge a purchase and the date the payment is due, allowing you to still earn interest on your cash.)
3. Your credit card bill functions as a record of your purchases.
4.  You can avail of interest free installment on some purchases.
5. You earn points from using the card, which can be used to redeem gifts items.

Despite the fee charged to the merchants by the credit card company, the former still enjoys the following advantages:

1. Losses due to theft or errors in handling cash in the store are minimized.
2. The use of credit card increases sales because the customer is not limited by the amount of cash on hand.

The psychology of credit card vs. cash

So you may wonder, why is the credit card always vilified in many financial literacy seminars and books? If you’ve watched the movie Shopaholic, there’s a scene when the main character had to put her credit cards in the freezer. And you see a lot of Suze Orman or Oprah shows dramatically cutting up those credit cards goodbye.

It’s because all the above advantages to the consumer are cancelled off when we consider the reality that the consumer is not always acting rationally and responsibly in his purchases. If we were always rational, we would spend the same amount on goods and services whether we buy in cash or with card because we know that either way we still be the ones to pay for our purchases, right? However, there are various things to consider:

1. There is a psychological pain in parting with actual money. I don’t know, maybe we somehow get attached to the heroes on the bills and coins? Paying for a P3,000.00 pair of shoes means you have to let go of 30 pieces of Manuel Roxas, or 6 pieces of Ninoy (sometimes with Tita Cory), or 3 pieces of the trio Escoda, Lim & Abad Santos. As you go on with your shopping, you see your wallet lose its bulk as you purchase one item after another.
2. Compare that to using your credit card. It’s one single charge slip whether it’s P100.00 or P100,000.00! Your physical wallet stays the same. Well, even a bit bulkier as you stash your charge slips in.
3. Buying in cash limits your purchases up to the amount of money you brought. This amount is something you decided on before you got into the heat of shopping. Decisions are best made in our so-called “cold state.” There are a lot of experiments in Behavioral Economics that prove that we make irrational decisions when in the “hot state of mind.” If you’re big on shopping, chances are the window displays easily put you in that hot state.
4. Irresponsible use of credit costs a lot of money. Credit cards charge an average of 36% per annum. So please, pay your credit card bill in full – all the time. Only charge what you can pay in full. Don’t even bother looking at the minimum balance but just focus on the total outstanding balance.
5. Never ever pay your credit card bill late. You miss one day and it will cost you a lot of money. On top of the interest rate is a penalty charge.
6. Avoid purchasing in installments, even those that are interest free. If you really need to purchase in installment, make sure that it’s really interest free. Ask whether there is a cash discount. (It’s a play on words sometimes). As a matter or practice, you are better off paying the entire amount in one go. Why? Because when you delay payment, your future monthly budget will be affected by this carry over. If you make installment payment a habit, you will see that your future budget is already burdened by purchases made months ago and keeping within your set monthly budget becomes more difficult.

Generous Dad, considering that your son is still a teenager, it may be wise for you to see if he really needs to have one at this point in time. Assess whether he already possesses the responsibility and the consistent rationality to overcome the above considerations each time he would use your extension card. I’m telling you, even adults have a hard time being rational all the time.

Training your child how to handle his own money is still better done with real cash. When you’re teaching him how to keep his expenses within his budget, there is no need to differentiate between cash accounting or accrual accounting. He only spends what he has.

Another option that you may consider is a debit card. This way, your teenager only spends what he has in his account.

If he has the tendency to love shopping, and you feel that this is the reason why he wants a credit card, then think again. All the sad stories of ridiculously high credit card debts probably started with one innocent and unmindful purchase. If one is a shopaholic (which is really an addiction), the credit card is like a pusher that brings him deeper and deeper into the addiction.

For me, only responsible spenders should use credit cards. And even they can still benefit from using cash if they’re trying to cut down on expenses.

Now it’s a different story if your son is away from you. When our sons went abroad to study for months, we gave them extension credit card. The credit card was the substitute for carrying a lot of cash and was given to cover any emergencies while they were away. However, the issuance of the card came with an agreement that it will only be used to cover agreed upon expenses. In fact, most of the time, they consulted us via email or text before using the card. Then when the bill came, they had to account for the items to distinguish which ones we (their parents) will pay and which ones they (the children) will pay.

I hope all these will help you decide whether your teenager is ready to carry that mighty plastic called credit card.

Wishing you financial happiness,

Rose

(Rose Fres Fausto is the author of the book Raising Pinoy Boys. She was an investment banker before she became a full-time mother to Martin, Enrique and Anton. Write your questions to maryrose_fausto@yahoo.com or log on to www.RaisingPinoyBoys.com. You may also send text to 0927-5159011.)

This article is also published in www.RaisingPinoyBoys.com.