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