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PLASTIC MONEY

This is the era of plastic money - credit & debit cards. They have changed the face of banking in India. Now, people can remotely access their money through these plastics.

Does it make sense to introduce children to plastic money? And if so, how & when?

Parents hold strong views on this topic. It is widely believed that unless children understand the basics of money through traditional sources like cash management, introducing them to plastic money can be harmful. In the US, some studies have conclusively proven that teenagers who use credit cards turn out to be less price sensitive and spend more as compared to those who have been exposed to cash & cheque management. The logic of this is simple.

Giving a teenager access to a credit card gives him/her the license to spend beyond real money provided and if the teenager gets into this habit, it can be extremely harmful. Hence, parents must first ensure children learn about money management through cash & cheques. And as children grow-up, parents can give them more financial responsibility. For eg: children can be asked to make payments to their parents' credit card bills, etc. This way they will get initiated into the world of plastic money and going further parents can also explain a sample credit card bill to the child.

Parents must proactively explain the difference between credit & debit cards to their children. A credit card is a form of plastic money, which allows people to spend now and pay back the money later. Credit cards are not linked to any bank account. The interim period - between the time money is spent & is paid is called 'credit period'. While using credit cards, people need to actively remember to pay up the card bill due else interest rate is charged on the pending payments. Using credit cards is similar to taking small loans at small intervals of time and repaying the same timely. And if the due payment is not done, interest is charged!

In contrast, a debit card allows expenditure only to the extent of funds in the account. And hence ensures that no overspending occurs. Debit cards did not exist 10 years back; only ATM cards did. An ATM card can be used to withdraw money from ATM's( automated teller machine also popularly known as any time money). In the last decade, ATM cards have been combined as debit cards and the same plastic can be used both for withdrawing money and making purchases. Debit cards are fast replacing cash or cheques. People actively use debit cards to pay their bills; and since there is no fear of extra expenditure/ delayed payments and hence high interest. They are fast becoming the popular face of plastic money.

We advocate that parents must begin introduction to plastic money formally by opening an independent bank account for the child and giving an ATM/debit card. This plastic allows the child to understand the concept of a savings account and how he/she can use the plastic to withdraw money from the ATM and also use the card for making purchases. For eg: If you plan giving Rs.1000 as pocket money to your teenager, you can open a savings account for him/her and give an ATM/debit card. He/she has access to the account 24/7/365. As & when the need arises, money can be either withdrawn from the ATM or purchases can be done using the debit card. And since money can be used only to the extent of Rs.1000, you are sure that your child is not over-spending and is also learning banking at an early age. Further, since the transactions done are recorded in the statement of account, you can easily monitor where/ what the spend is being done.

Once the child is completely comfortable with the ATM/debit card format of plastic money, parents can gift a credit card to the child. As explained already, it is not wise to give a credit card to the teenager without adequately explaining the entire concept of controlled spending. These days plastic money has become a status symbol for teenagers and in an attempt to pamper children, parents often end up gifting them a credit card. We would strongly urge parents to introduce children to plastic money with debit cards and once the teenager is wise enough, you can give them a credit card also. However, it must be clearly explained to the child that spending on the credit card must be limited. Taking the same example as earlier, if your son/daughter gets Rs.1000 of pocket money every month, you must mandate that across their credit & debit plastic, spending must be controlled at Rs.1000. And in case, in a particular month, spending goes beyond the limit, the payments for the credit card must be duly managed next month.

Parents must be extra cautious when giving credit cards to their children. Even as adults, credit cards lead to over expenditure. This is because there is a sense of deferred payment on the actual spending leads to a certain comfort level on extra spending. This kind of behavior on a habitual basis can be extremely harmful and lead to compulsive spending behavior.