Review Your Credit Card Statement!

Do you carefully check your credit card statements, and review the transactions? It can help ensure that you’re not being charged unnecessarily for any ”phantom” transactions, unauthorized purchases, or mistakes.  I had an experience recently that serves as another example of why we take the time to at least scan through our statements each month.

First off, I make it a practice to pay off any bills in full each month. I don’t like to carry credit card balances, and simply don’t do that. Rather, I pay it all in full and on time each month. So, when reviewing a credit card bill, I typically don’t think of there being any issues in those areas. I’m usually focusing on transactions instead.

A recent review of a statement showed that all the transactions seemed fine, but something else jumped out at me: an interest charge! Impossible, right? After all, I pay may bills on time and in full, so there should be no problems.

Immediately, I called the credit card company. After describing the situation, and asking why it happened, it turns out that my last payment had been received late. Now, that’s not something I wanted to hear, since you just don’t want to be paying bills late.  There must have been some kind of mistake on their part!

Well, after they described the situation, I froze for a second and realized that I had been busy the month before and my payment was made close to the deadline. I normally don’t do that, but it was just one of those things. However, I pay bills online and the payment date was supposed to be right at the deadline date. Apparently, it must have hit right after that so thus the late fee.

Ouch.  Obviously, if you read this blog, you know that this is NOT something I would be happy about. Being someone that takes pride in financial responsibility, I didn’t like that this happened.

I explained the situation to the person on the phone, and stated that I pay my bills on time in full every month, and that was the reason I was surprised and called. The guy on the line then said he would make sure that the fees were reversed and charges removed. Great!

After getting charges reversed, I felt some satisfaction in knowing that reviewing a credit card statement saved money. Of course, I also learned a lesson that even people who are responsible can slip and make a mistake by procrastinating. Best to pay bills well ahead of the deadline, to avoid any situations like this where you have to call. Separately, one might also consider looking for a cheap credit card. Minimizing credit card expenses is a good thing.

Finally a big thing I learned from the experience is that building up a stellar track record of paying in full on time can build goodwill.

My Questions for You

Do you review your credit card statements each month?

Have you ever found any surprise charges on there? If so, how did you handle the situation?

What is your process for making the payments each month?

Have you ever been in credit card debt?

Personally, I’m fortunate enough to have never been in credit card debt. It’s always been a part of my financial ways to try to pay off credit card bills in full during each billing cycle.  So, thankfully, I’ve avoided the stress involved with over reliance on credit cards, and the need to pay off credit card debt.

A few months ago, I was talking to a friend about somebody we both knew. I don’t keep in touch with this other person, and see her extremely infrequently, as in once every few years. However, my friend is more involved in a different circle of people, and communicates more with this other person. Anyway, he shared with me that this person – we’ll call her “Jill” – was unemployed and running out of money. Being single, she didn’t have a spouse’s income to help her. Clearly, she hadn’t saved much, and now was carrying a credit card balance.

My friend was suggesting (to me, not her) that Jill should just stop using cards altogether, as that’s what probably got her into the mess in the first place, or at least contributed to it. In his view, anyway.  To me, this isn’t the problem. If overspending is the issue, it’s more her self-discipline and financial literacy that’s the problem. I don’t know her that well at all, but recall talking about jobs and careers with her once. She seemed to have her head on straight and seemed otherwise intelligent. This is why I’m guessing it’s discipline and knowledge that are the culprits.

Now, I do think that Jill should focus on A) finding a source of income, some way, some how; and B) eradicate that credit card debt as soon as possible.  However, In my view, credit cards in general can be a valuable tool for people to use. Thus, I don’t advocate her giving up credit cards altogether.

Here are some benefits of using credit cards:

1. Rewards. First off, I will say that paying cash can sometimes provide a benefit. When you ask for a discount and offer to pay in cash, you might get a deal.  However, this is tough to do for most purchases. Thus, if you charge a lot of your day to day shopping, you’re not missing out on cash discounts and can in fact receive rewards. I slowly accumulate airline miles with one of my credit cards, and have a round trip airfare awaiting for my efforts!
2. Cash Back. Some cards can offer a different kind of “reward” – money back. There are some interesting cash back credit cards out there, and quite a number of people like this option.  An effective discount on purchases, if possible, is a nice perk.
3. Building Credit. By having credit, and paying off bills regularly and on time, people can prove themselves to be creditworthy. When buying a home, for example, having a good credit score can help secure a good interest rate, much less a loan in the first place.
4. Float. By paying cash, you’re shelling out money right away. By charging, you’re delaying payment. If you could let the money sit in an interest-bearing account for an extra 20 days, for example, you might earn a little extra money this way. When aggregated throughout the year, this can amount to something more than just a few pennies. Why not take advantage?
5. Tracking Expenses. With credit cards, each transaction is automatically recorded, and you can easily view a summarized list of expenses for a given time period. By paying cash, it makes it that much more time consuming to keep track of expenses. More knowledge can result in taking action on potential overspending, and can engender better habits.
6. Consumer Protection. In some cases, there is some level of insurance involved with credit card use. In other words, some cards can offer you warranty protection in certain cases, travel insurance, or even rental car insurance.
7. Ability to Make Certain Purchases.  Whenever I have rented a hotel room or a car, I’ve needed to have a credit card to complete the transaction. Avoiding having a credit card can make such transactions more difficult.
8. Convenience.  Let’s say you charge something that cost $11.02. Yeah, it’s a random number, but work with me for this example. If you pay with a credit card, you get a receipt back. If you pay by cash, you get change. If you hand over a $20 bill, you’ll back get one $5 bill, three $1 bills, three quarters, two dimes, and three pennies. That’s the best case. Who wants to lug around that much change?

Now, these are all great reasons to use credit cards. However, use of credit cards should be accompanied by self-discipline. Pay your bills on time, in full, every month. Additionally, don’t buy more than you would otherwise buy if paying in cash. If you can do those things, credit cards can be an essential part of one’s finances.

As for Jill, from the discussion above? I think that the notion that she should abandon credit cards altogether is overreacting. Self-discipline is the key for her, along with reducing that card balance ASAP.

My Questions For You:

What’s your view on self-discipline and credit cards? Is it different than mine?

Do you know of any other advantages (or disadvantages) of using credit cards, that you can share?

What do you think of the notion that Jill’s biggest problem is self-discipline, as opposed to the use of credit cards?

After hearing a popular song a few times recently, I’ve been thinking about how Katy Perry relates to personal finance.

What? How are Katy Perry and personal finance related? Well, I’m sure she’s making a ton of money, so her financial situation is much different than any of ours, right? Well, that’s my assumption anyway. If I’m wrong and you’re pulling in millions per year, then that’s great for you:)

The real reason I think of Katy Perry and personal finance is her song “Last Friday Night”.  In case you aren’t into that part of the music scene, that song is one of 5 from her latest album that reached #1 on the Billboard Top 100 Chart. This feat tied Michael Jackson for the most songs from the same album to reach #1. It’s a song where she talks about a crazy night out, including a line about maxing out credit cards!

Here’s the sequence in the song.

Last Friday Night

Yeah we maxed our credit cards

And got kicked out of the bar

So we hit the boulevard

Last Friday Night

Later in the song, after talking about a bunch of other wild and crazy antics from that night out, she says

This Friday Night

Do it all again

It’s a fun, catchy song many might agree. Clearly, it hit #1 on the charts.

It also apparently includes, in the narrative of the fun night out, maxing out credit cards as a part of it.  I’ll bet very few people thought twice when hearing the lyrics to the song, with respect to that line. It seems like it signifies part of a great time, maxing out credit cards. There are other memorable lyrics in the song anyway I suppose. “Maxing out credit cards” probably won’t raise too many eyebrows, right?

Well,  it didn’t get by this personal finance writer.

This maxing out credit cards for fun stuff is the type of behavior that gets people in all kinds of trouble. It’s too bad that these sorts of choices are glorified, especially for younger, impressionable people.

Of course, who in the world would enjoy lyrics about a fun night out that involved being frugal instead of saying that they maxed out their credit cards? Yeah, not many people. I know. Well, in any event, how about something like this:

Last Friday Night

Didn’t touch our credit cards

Saved our cash when at the bar

Fillin’ up the penny jar

Last Friday Night

Ok, I know. You don’t have to say it:)

I wonder if saving money will ever be cool? What do you think?

The following is a guest post by David Boyd, co-founder of CreditCardCompare.com.au, which is an Australian comparison service. Check out their debt calculator to help work out how much you can save.

Credit card debt can be one of the most difficult aspects of a consumer’s financial life to balance. Depending on each individual’s situation, managing this debt can be a simple matter of utilizing tools that are readily available.

In more complex debt cases, the services of a licensed financial counselor may be needed; in either case, many consumers of credit may discover that the tool of balance transferring from one credit card to another is a viable way of reducing and managing the amount of debt that they owe.

Balance Transfers

Banks offer balance transfers for several reasons. Credit companies are in fierce competition with each other for new customers, especially for customers from a rival company. Consumers can cash in on this need by taking advantage of the incentives that are offered by the company during the transfer’s specified period.

These incentives can reduce the monthly payment because of the way the monthly payment is calculated. Essentially, there is a formula that determines how much gets paid each month. It is calculated by multiplying the total balance amount owed by the annual interest rate and dividing that total number by 12, which is the total months in a calendar year.

For example, say that the total balance owed is $2,000 and the annual interest rate, or APR, for that credit card is 22%. This is a high interest rate to pay, but it is very typical of credit card companies to charge a rate this high. It is also the main reason why a balance transfer of 0% for a limited time will save quite a bit of money. To find out how much, keep reading.

Calculating Monthly Savings on Transfers

In the previous example, the $2,000 is multiplied by .22, which is also 22%, in order to give the total amount of $440. This is the total amount of interest that the customer will pay on the loan for one year. If the teaser rate was 0% for 12 months, the customer would save $440 for that year.

But what would happen if the teaser rate was only good for six months, or four months? In any case, to find the monthly payment, just add the balance and the interest and divide by twelve. $2,400 divided by 12 months is a monthly payment of $200. However, during the teaser period, the balance would be added to 0% APR and divided by 12, leaving a monthly payment of only $166.67. If the teaser period is six months, and the difference between the two payment plans is $33.33 each month, than over six months, the balance transfer will have saved $199.98. Of course, these numbers change when the balance is paid down, and this happens every month as payments are made.

One of the best balance transfer strategies that a credit card consumer can have is to practice responsible payment of their debt. This means that the money saved should be immediately recycled into paying off the balance of the credit card. That $200 saved over six months can reduce the balance owed, which will reduce the monthly payments even more. The lower that total balance, the more manageable the debt as a whole.

The best credit card term to look out for on these balance transfer offers is the fixed loan rate or fixed life of a loan rate. This is the rate that will apply to the loan once the teaser period of 0% APR runs out.

In the above example, it was 6 months. At the end of that time, a new rate will set in, hopefully lower than the original rate of 22% APR of the previous card – again, just in this example.

In order to do this successfully, customers must know what their APR is right now, and what it will be at the completion of the trial or teaser period.

The following is a Guest Post

In a perfect world, everyone would practice frugality like it was a religion. Why? The benefits range way beyond each individual and extend across continents, affects the environment and the economy. More and more people are taking stock in this economy and realizing they can live a fulfilling life with less, not more.

Strategies For A Frugal Lifestyle 

The word “frugal” might be a little intimidating, but all it means is being more economical, taking advantage of sustainable practices and embracing a minimal lifestyle. There are many strategies and options available to those looking to cut expenses, save money or just wanting a simpler and less stressful life. The underlying philosophy can be summed up by the statement, “More isn’t always better.”

Here are some strategies you can utilize to start living a more frugal life:

1. Reduce your credit card debt. This is probably one of the biggest hurdles you can face when looking to downsize. One strategy is to evaluate the best credit card deals, choose the best one for your situation and taking advantage of 0% balance transfer credit cards and consolidating all your credit cards into one payment. Pay as much as you can on the principal every month, and you’ll get the balance down faster than you think.
2. Consider alternate forms of transportation. If you are lucky enough to live in an area with public transportation, utilize it. You will save wear and tear on your car, save in gas money, and may qualify for a discount on your car insurance.
3. Have a 24 hour “cool off” before purchasing big ticket items. When you feel the urge for the latest technological gadget, a bigger television or an upgrade on appliances, wait a day and see if you still feel the same. You might want it, but a want is much different from a need. Take a day and sleep on it.
4. Re-use, recycle, re-purpose. Take it easy on your wallet and on the environment. Re-use something if you can, or donate to someone else. Recycle grocery bags, plastic, metal and paper. Instead of throwing something away, use your imagination and creativity and re-purpose that dresser into a potter’s station, for example.

A frugal lifestyle doesn’t mean going without. It means focusing on what you have and not on what you don’t have. Extend this philosophy to other aspects of your life, including downsizing your home, car, cable package, grocery bill. If everyone was frugal, there would be less strain on the environment and a lot less stress to deal with on a daily basis. Give it a try – you really have nothing to lose.

The following is a post by guest blogger Michael, founder of CreditCardForum.com, which is a website for credit card reviews. He also writes on a number of other personal finance topics like budgeting and saving money.

During the recession they all but disappeared, but now those “free” flight credit card promotions are back… but are they truly worth it? Surprisingly, instead of saving you money, travel credit cards may actually be harming your budget! Here’s why…

The annual fee isn’t always waived
Not all of the offers waive the annual fee for the first year. Being that most airline and hotel credit cards charge annual fees ranging from $60 to $150 and up, that’s a steep price to pay just to get a mileage bonus! So to figure out the real value of a signup off, make sure you take the fee into account if it’s not being waived.

The bonus points might be given to you over time
I’m a huge fan of the Escape card by Discover because it essentially gives 2% on your spending, but I’m not so much a fan of how they structure their signup bonus. They give 25,000 miles for getting a new account but you don’t get those all at once. Instead, for 25 months you get 1,000 miles for each month you make a purchase. I still love the card for the 2% rewards but I certainly wouldn’t recommend applying for it if you are expecting a quick and easy signup bonus from it, because that’s not going to happen!

The bonus miles aren’t enough for your ticket
As a general rule of thumb, if an airline travel credit card says you are getting enough miles for a free flight, you should assume it’s for an off-peak times and limited routes.

I found this out the hard way upon signing up for a credit card from Spirit Airlines. The reason I applied was to get the free flight, but the points weren’t near enough for my flight between Detroit and Los Angeles. No matter how far I looked in advance, I couldn’t find a way to book that flight using the bonus miles alone. I have since read a number of credit card reviews from other cardholders that share this same complaint.

Years ago I remember the backlash there was when American Airlines started the tiered pricing for award flights (MileSAAver Off-Peak, MileSAAver Peak, and AAnytime). But nowadays every airline card that I know of does the same thing. As fuel prices have risen the last few years, it keeps getting harder and harder to snag a flight for the base number of point and I don’t see that trend changing. Good for airline profits, bad for those of us trying to spend our miles!

Because you don’t have enough miles, you spend more
This is probably the biggest problem when it comes to travel rewards credit cards. The typical signup bonus is 25,000 miles but most flights end up costing at least double that – 50,000 miles. We apply to get our free flight only to discover we don’t have anywhere near enough miles. So what do we do? We start spending more so we can get that ticket. It might not be something as drastic as buying a new TV to rake up miles, but it could be spending a few more bucks at the grocery store every week. I’ve heard from many people who have confessed to doing this.

But the predicament gets even worse if you signed up for a first-year free offer, and did that with the intent of canceling before the second year. Now you might be stuck between a rock and a hard place – at the end of the first year you have a nice chunk of points but it’s not enough for your ticket. It’s too many points to forfeit so you bite the bullet and decide to pay the annual fee for the second year… and here you thought opening the card was going to save you money!

Conclusion?
Don’t get me wrong, for the right person airline credit cards make complete sense. However for a lot of people they simply won’t make sense, as demonstrated above. The same rules apply to hotel credit cards too… they really don’t make sense unless you travel an awful lot and stay at the same high-end hotel chain each and every time. At the end of the day, I would say that the average person if going to benefit more from a regular cash back card more than they will from a travel credit card

Editor’s Note: I think it comes down to the notion that I often bring up here – it’s hard to get something for nothing. Yet, many if not most of us have that urge. Those rare times that it happens, it’s great. But it’s not as easy as just getting a truly free flight just for opening an airline credit card! We should all be wise to read the program details and think it through, since these cards can work for some people but not all, as the author indicates.

The following is a guest post by Jason Holmes. Jason is a regular writer with Debt Consolidation Care and is also a contributory writer with other financial sites

Do you have huge amount of credit card debt and want to get rid of your debts quickly? Are you facing difficulty to pay off your credit card balances in full? In such a situation, you can consider debt settlement option to get rid of your credit card debt quickly. It is a debt relief option in which you become debt free by paying less than what you owe on your credit card bills. However, usually creditors agree on reducing the outstanding balances only when you have missed the minimum monthly payments for 3-4 consecutive months.

Read on to know how a debt settlement program can help you get rid of your debts and how you settle your debts all by yourself.

Debt settlement program – How it functions

There are several settlement companies and you can choose a reliable one to pay off your credit card bills/debts.

When you enroll in a settlement program, a debt negotiator, on behalf of the settlement company, starts negotiating with your creditors to reduce the outstanding credit card balances to about 40-60%. In the meantime, the negotiator assesses your financial condition and decides upon a monthly amount that you need to deposit into your settlement account. As soon as one of your creditors agrees to a reduced payoff amount, you need to pay the creditor by using the funds accumulated in your settlement account. In this way, you pay off one creditor after another and get rid of debts relatively fast.

Debt settlement – Tips to negotiate on your own 

Instead of getting professional help, you can settle your credit card bills all by yourself. By doing so, you can save the amount that you otherwise need to pay to a settlement company as professional fees. Here are some tips which you can follow if you decide to settle your unsecured debts on your own.

Explain your financial situation.  At first, assess your financial situation to calculate how much you can pay to your creditors. Then, meet your creditors and explain your financial situation to them that you won’t be able to pay back the balances in full. Then, request to reduce the payoff amount to about 40-60% so that you can pay back the reduced amount.

Do not negotiate over phone.  It is always better to talk face-to-face with your creditors instead of communicating with them over phone. Even if you negotiate over phone, follow it up by sending a mail with return receipt request.

Inform creditors about approaching SOL.  If required, you can inform the creditors that the Statute of Limitations (SOL) on the debts are approaching and therefore, there’s limited time to reach an agreement.

Get everything in writing.  You should get everything in writing and sign an agreement with your creditors before you pay the amount agreed upon. You should also request a receipt stating the amount you’ve paid to the creditor.

Keep all record of communication.  Keep each and every record of your communication so that you can produce it in future if required.

It is advisable that you choose debt settlement option only when your financial condition doesn’t permit you to pay the bills in full and you want to get rid of the debts quickly. This is because your credit score may get reduced by several points when you opt for settlement. However, settlement is a much better option if the only other alternative is to file a bankruptcy.

Editor’s Comments: I certainly hope to never be in the situation of having to deal with a scenario like this. Spend less than you earn, squirrel away the money, pay bills in full and on time, tell the difference between wants and needs – hopefully these behaviors will help avoid a situation such as this. For more on avoiding debt, read my 5 Rules for Achieving Debt Free Living

The following is a guest post from Mr Credit Card at www.askmrcreditcard.com  who is going to highlight how credit cards can be used to save money 

There are many people who carry a balance on their credit card every month.  If you are one of those people, this article is not for you.  Unlike you mortgage and student loans, credit cards have a high interest rate and the interest paid not tax deductible.  Using a credit card to finance purchases is the opposite of saving money. 

If you are one of the many people who always pays their credit card off in full and on time, keep reading.  I am constantly meeting people who are otherwise frugal, but are not maximizing their savings by using a reward card (ie they are not using the best credit card for their circumstances).  Some write checks, use cash, pay with debit cards, or just use a non-reward card that they have held for some time.

A far greater number are just using any old reward card they have, and haven’t considered if that card is still the best one currently on the market.

Save Money On Everything 

Almost everything you pay for can be put on a reward card.  Let’s say you are earning the equivalent of 2% back for every purchase. 2% sounds rather trivial, or does it?  If you spend $30,000 a year ($2,500 a month) on your credit card, that is $600 saved. Since the cash back is a discount, not an earning, you don’t pay taxes on it.  Another way to look at it is that you are getting approximately the same post tax benefit as you would if you received a $900 a year increase in your salary.  All of the sudden, 2% sounds pretty good. 

The Catch 

First, you have to separate your rewards from the entire thought process of spending.  You can never think about the reward as an incentive to spend.  Remember, you credit card is just a convenient method of payment, not a way to get rewards. If the thought ever crosses your mind to spend more to get a reward, you should not be in the reward card game. 

The next catch is truly getting your 2% or better.  Many cards offer 1% cash back on all purchases, with others  providing 3-5% back on spending with different merchant categories.  Some cardholders prefer rewards in the form of loyalty points that can be redeemed for travel services or merchandise.  Just make sure that the reward is for something that is  worth 2% or more of the spending it took to earn the points or miles. 

Rewards To Savings

If you were truly planning on spending your cash for something that you earned an award for, that the savings are absolute.  When you earn cash back, again you have definitely saved money.  To segregate your savings from your spending, some people opt for reward cards linked to savings or investment accounts.  For example, the Fidelity Investments Visa card gives you the equivalent of 1.5% cash back into your investment account, up to $10,000 a year.  After $10,000, you earn an outstanding 2% cash back. For high spenders, that is difficult to beat. Schwab bank used to offer 2% a cash back credit card, but they no longer do.

Other Ways To Save Money With Your Card 

Never overlook the fact that you credit card offers you up to 50 days of free interest.  Know when your statement closes every month, and try to make large purchases the following day.  For example, if your statement closes on the 15th of September, a purchase made on the 14th will be due on or about the first week of October. If you hold off on your purchase until the 16th of September, your payment will not be due until the first week November, giving you an extra month of interest on your money. It should go without saying that you will receive no benefit if you do not pay your balance in full every month.  Finally, be familiar with the details of all of the extras that come with your card, such as warranty extensions, purchase protection and rental car coverage.  Taking advantage of these offers is yet another way to leverage your credit card towards your savings goals.

I recently went to see a movie with my 7 year old daughter.  It was going to be a great Daddy and Daughter time, just the two of us having a fun few hours.

I had promised her a chance to see the most recent Shrek movie, and she was excited about it. For me, there was excitement because this might be the last movie in the Shrek franchise:) That said, I was looking forward to the movie because of the chance to share in her excitement, and to have a fun Sunday afternoon together.

So we went to the theatre complex, I parked the car, and we walked in. We saw on the marquee that the movie was playing in three forms:  normal screen, 3-D, and 3-D on an IMAX screen. For those that haven’t experienced it, the IMAX is pretty cool – you get to see the move on a much larger screen and in higher resolution. The sound systems are typically very good, so the overall experience is different but a bit better in my opinion.

Anyway, my daughter saw that it was showing in IMAX and got excited about the possibility of seeing the movie in that particular format. She really wanted to go. So, what does a dad do? I said yes. Couldn’t resist, and actually, I didn’t think about the consequences. Perhaps it was a few dollars more, I thought, but I really didn’t give it much more thought than that. I just thought of her happiness and excitement.

So we walk up to the ticket counter, and I ask for one adult ticket and one child ticket. The cashier promptly said: “That will be $30.50 please”.

I paused. I did a double take. I thought to myself…$30.50? Really? Are you KIDDING me?

So, I asked the cashier how much the other options were. She said it would have been $14.50 on a conventional screen, $23 to see it in 3-D, and $30.50 to see it in 3-D on IMAX.

I looked down at my daughter, with those puppy dog eyes of hers looking up to me, and I said to the cashier: “That’s fine. Here’s my card.” Then I let my daughter hand the card over (by the way – that’s not my daughter in the picture; kids aren’t growing up that much faster these days!)

So, as we walked into the theatre and to our seat, she said: “Daddy, these tickets are expensive.” Feeling like I had already said enough about money after questioning the cashier, I told her that it was ok and that I was glad that we were going to have fun.

Then, she surprised me, as kids often do to their parents. She said: “It’s a good thing you used your credit card so we didn’t have to give them any money.”

I paused, and thought to myself, surely she doesn’t think these were free. A few months back, she had shown some surprising maturity for such a young kid, when she told me about saving and investing. This time, it looked like another learning opportunity to teach a child the value of money.  Just to confirm, I asked if she thought that using a credit card means that we weren’t paying anything.

Her answer: “If you use your credit card to get something, it means it’s free!”

So, I tried to explain to her that if that were the case, then wouldn’t everybody use them?

“Yes”, she said. “If they don’t make what you buy free, then how do they work?”

I quickly came up with an example. I started by saying, “let’s pretend that you buy 10 hamburgers in a month, for $1 each. With a credit card, you can charge them each time, and then pay all $10 at the end of the month.”

She immediately said, “But I don’t like hamburgers that much!”

OK – I forgot that I was talking to little kid here! Let’s try again, I thought.

“Well, instead let’s pretend that you bought a barbie doll for $10″, I said. “If you pay with cash, you will pay the store $10 right away. If you pay by a credit card, you don’t pay them right away – but will pay in a month after the credit card company sends you a bill.”

“Why would you do that?”, she said.

“You would pay them because you owe them. Since the credit card company let you buy the things with their card, you will owe them later”, I said. “It’s not fair for them to let you buy things, and then you don’t pay them back.”

I think she got that, from her expression.

Then I added, “the good thing is that you can buy even more things, add up the cost, and pay them the total when the send you the bill. So if you got another Barbie two weeks later, and it was also $10, how much would you then owe the credit card company?”

She thought about it, and said, “You would have to pay them $20″. I was pleased – she figured out how the payment process works. At least that part of the equation was understoon, which is a good start!

Ultimately, I can’t pretend credit cards don’t exist. They do. Some even offer cash back, such as Chase Freedom Ulimate Rewards. I want her to eventually have an understanding of their proper use, the need to never carry a balance or pay interest/late fees, and the benefits of cash.

Overall, this experience reinforced and also taught me a few more things about kids and money:

1. Don’t assume that they understand what appears obvious to you. Clearly, we all know that credit card doesn’t equal free. While far too many adults still charge away like there are no consequences, if you’re reading this or other personal finance blogs, you probably don’t do that. But if some adults actually do have difficulty understanding some basics, then it’s certainly understandable how kids have their own learning curve as well.
2. When explaining a concept to kids, keep it simple. Instead of complicating it as I initially did, I changed tactics and talked about one barbie doll instead of 10 hamburgers. One purchase makes it a simpler concept.
3. Make it interesting. Talking about hamburgers got her distracted. Talking about something she likes, Barbie dolls, kept her engaged.

Have you had any experience teaching kids about credit cards – whether younger child or teenager? Any tips to share with us?

This article was published in the Carnival of Money Stories at Sweating the Big Stuff