Should We Give Credit Cards to Kids?

Credit Cards and Kids

First Published: ADawnJournal.com April 3, 2010

We are living in the age of the Internet and high-tech electronic payment systems – an age in which you don’t need to carry physical money to pay for expenses. Denying the use of credit cards for kids would be like denying them living in the 21st century. These days, credit cards have become a common daily necessity like cell phones and drivers’ licenses. Credit card companies know that teenagers are a good segment of their target market and they are campaigning fiercely to grab their market share. Leaving kids unaware of credit cards would make them fall into the credit card debt trap and will make their whole life miserable in later years. Teaching kids how to handle credit cards and stay debt-free is an important part of being a parent and these lessons should start while they are still at home and at an early age. Today, I will look at the many different aspects of credit cards and kids.

Do Kids Need Credit Cards?

Whether parents like it or not, kids will be exposed to credit card offers these days more than ever. Mail-in offers, credit card companies trying to reach out to kids through various marketing and promotional techniques, and the plastic culture society (using plastic is considered cool) we are living in today – will make it impossible to deny let our kids the use of credit cards. If parents don’t allow them to use it, they will get their hands on it without parents’ knowledge; and credit card companies wait to seize these opportunities so they can prey on kids when kids are ready to try plastic without their parents’ knowledge.

That’s why parents should take the early initiative to break financial illiteracy and start giving kids financial lessons while they are still at home. Early education prevents financial disaster and costly mistakes at a later age. If kids know all the ins and outs of credit cards and start using them responsibly under guidance, they will be able to handle credit cards responsibly and in the long run will be able to avoid credit card debt and will score good credit ratings.

Benefits of Giving Kids Credit Cards

·   Building Credit: Although a credit card is not the most important factor in building good credit, it can definitely be a good tool to help establish good credit. By using credit cards responsibly and paying bills on time, kids will be able to start building a solid financial backbone.

·   Spending Plans: The word “Budget” may be a difficult one for kids to grasp. Create Spending Plans for them and teach the difference between Wants and Needs. Impulse buying can lead them into financial turmoil. Teach them how to spend money wisely on things they need and monitor their credit card bills carefully to make sure they are on track. Teach them the pitfalls of high balances and late payments and guide them to avoid these always.

·   Financial Responsibility: Teach kids about financial services and products along with credit cards as personal finance lessons are not given at educational institutions. Early personal finance education will instill values and responsibilities in kids and it is likely that they will analyze various financial steps they take and will avoid debt, paying interest, and actions to ruin their financial future.

What You Need To Do Before Giving Kids Credit Cards

Let’s look at some scenarios you need to consider before giving them a credit card.

·   Start Talking: Start talking to your kids about the pros and cons and other aspects of credit cards. Tell them the good things about credit cards such as convenience, credit score, better job prospects with a better credit score, lower insurance rates and so on. Tell them the bad things such as interest, late payments, misuse of the card, how it can ruin their credit rating and so on. Tell them about minimum payments, interest charges, why it is wise to pay the balance in full, the effects of late payments, the effects of spending beyond limits and so on.

·   Does He/She Have a Bank Account? Make sure he/she knows how to deal with a bank account and ATM cards, and teach them banking basics before handing them a credit card.

·   Is Your Kid Ready? You need to make this judgment call to determine if your kid is ready to handle credit cards. Is he/she responsible and able to handle money and credit cards? Does he/she know when to buy and when not to buy? What to buy and what not to buy? Does he/she have a job to pay credit card bills? If not, how it will be paid? Will he/she be paying off the balance in full every month? Does he/she realize that interest will be charged if the balance is not paid in full? If you think he/she is not ready yet, continue giving them lessons until he/she is ready.

·   Lay Out a Roadmap: Tell them exactly what things are allowed with their credit cards and what aren’t. This will avoid confusion later on. Tell them what may happen if they fail to follow these guidelines.

What Kind of Credit Cards Should You Give Kids?

There are different opinions on this matter. Some financial experts suggest that you should start with a debit card first and then switch to a credit card. Some experts argue that a prepaid credit card is the best vehicle to start teaching kids about credit cards. Some experts think parents should add kids to their own card as an authorized user so they can monitor how they are doing. However, my own point of view is little different and I think the best type of credit to start with for kids is a credit card with a lower limit. I will tell you why I think this way and what the problems are with the other views I mentioned above.

First of all, a debit card is a debit card. It comes nowhere near close to giving your kids the experience and lessons you expect to give by using a credit card. Before having their first credit card, they should already have a bank account, an ATM card or debit card and this should be enough to give them the experience of how a debit card works. So a debit card is not an alternative to a credit card and kids should have a bank account and a debit card whether they have a credit card or not.

Secondly, prepaid credit cards may sound like credit cards but they aren’t giving kids the real-life experience of a real credit card. These prepaid credit cards have no monthly bills, interest rates, or late fees, as they are paid before and you can use only up to the amount you loaded onto your account beforehand. So it is missing the real, relevant experience of a credit card.

Thirdly, parents should never add kids to their own credit card account. Parents’ credit card accounts will always have much higher limits than you want your kids to access and it will not give them the sense that they need to be financially responsible, as they will know that this is not their own credit card and they don’t need to act responsibly.

A credit card with a lower limit, $200 to $300 to start with, is the best credit card teaching vehicle for kids to start learning the uses of credit cards and start the journey towards becoming financially responsible.

What You Need To Do After Giving Kids Credit Cards

Monitor the transactions on the credit card account regularly. Make sure they are not buying above the limit or buying the things you asked to avoid. Make sure they are paying bills on time. Reinforce the roadmap you laid out before for using the credit card and make sure they are following it. Discuss credit card mistakes you have made or someone else has made in the past and tell them to use them wisely to stay out of credit card debt. Show them good resources on the Internet to learn more about personal finances and how staying financially healthy can pay off throughout the course of their lives. With all the good intentions, if they falter and are unable to handle credit cards and make small mistakes, help them to bailout – but give them the message that this is not going to be a repetitive act and they will have to pay off the bills by working off their own money.

At What Age Kids Should Get Credit Cards?

It all depends. If your kid is ready to handle it, a credit card can be given to 12 – 15-year old kids. However, don’t continue credit card ties with your kids after 20 + years of age. At this point, this should be the end of their college years and they should be responsible enough to handle their own credit. Let them know at least a year ahead that this will be their last year to have credit cards under your guidance and monitoring.

Last Word

Kids do what they see. Teaching alone will not be sufficient to teach kids about credit cards. Kids will watch their parents and copy their financial behavioural patterns. It is important for parents to be financial role models and set up good examples for kids to follow towards achieving financial success. Bottom line, early credit card education depends on how parents proceed and handle their kids’ credit card journey, including misuses of credit cards. Kids can become more responsible or less responsible depending on their parents’ actions.

What Is Deflation?

Definition and Causes of Deflation 

First Published: ADawnJournal.com April 3, 2010

Deflation is the opposite of inflation, and that naturally means that it is a good thing for the economy. Deflation represents a decrease in the price level of goods and services. It happens when inflation falls below zero percent, which causes an increase in the value of money, which allows you to buy more goods with the small amount of money.

While deflation can be good because we can buy more things with the same amount of money, but deflation is not always a good thing. In fact, deflation is linked with recessions and even the Great Depression. Deflation also prevents a government from being able to stabilize its economy. This doesn’t mean that deflation is only about poor economic times though.

What Causes It?

Deflation is caused when the supply and demand of goods goes up, and the supply and demand of money, goes down. So, when there is an increase in production on goods and services, it causes there to be a greater supply of goods, without increasing the supply of money to buy those goods. When the money supply goes down, typically the demand for goods goes down as well. This doesn’t happen with deflation. A rise in production, with a lack of supply in money, creates that unique combination for deflation.

Types of Deflation

There are four different types of deflation that can happen.

1.   Cash Building Deflation: This is caused when people are saving more money, which decreases the use of money but increases the demand for money.

2.   Growth Deflation: This is when there is a decrease in the Consumer Price Index and an increase in the supply of goods.

3.   Bank Credit Deflation: This is when there is a decrease in the credit supply of the bank, caused by bankruptcies, and a contraction of the money supply from a nation’s central bank.

4.   Confiscatory Deflation: This is the freezing of bank deposits and a decrease of the money supply.

Times of Deflation

In modern times, there have been several instances of deflation in several industrialized countries. Some examples include:

·   During the First World War, the British Pound was removed from the gold standard to finance the war. This caused a rise in gold prices and rapid inflation, while decreasing the exchange rate of the pound. When the pound was retuned as the gold standard when the war ended, it was done so at the pre-war gold price, which caused prices to fall.

·   In the United States, there have been three times of major deflation. The first was in 1836 when the currency of the country contracted by one-third. The second was during the Civil War, which was caused by the retiring of paper money during the Civil War, as well as the return of the gold standard. The third was between 1930 and 1933 when the deflation rate was 10 percent per year because so many banks were failing. There may be a fourth deflation crisis going on right now according to some economists, but only time will tell if they are right.

What Is The Consumer Price Index (CPI)?

Definition of Consumer Price Index (CPI)

First Published: AdawnJournal.com April 7, 2010

Something that is very important for the economy, but which a lot of people do not understand, nor know about, is the Consumer Price Index. The Consumer Price Index is important because it provides a measure of the average price of consumer goods and services from one period to a next within a city, region or country.

As can be expected, this gives an indication of how much people are paying for goods and services. The more people have to pay for goods and services, the worse the economy is generally doing because of the rate of inflation. Inflation is typically higher when the economy is doing poor, which influences the Consumer Price Index.

The Consumer Price Index is determined by measuring the price of a group of goods, which would represent the typical purchases of a consumer. In addition, the Consumer Price Index can be used to index things like wages, pensions and salaries. For economists, watching the Consumer Price Index along with the census of the country is very important for determining national economic statistics.

In the past, the Consumer Price Index of the United States has provided a good indication of the strength of the economy. From 1971 to 1977, the Consumer Price Index of the United States increased by an astounding 47 percent, showing the rapid inflation that was happening at the time. In 2009, the Consumer Price Index actually fell for the first time in over 50 years, dating back to 1955.

In Canada, prices are measured against a base year to find the Consumer Price Index. Currently, the base year is 2002 and the value for the 2002 basket of goods is 100.  In 2008, the Consumer Price Index had reached 114.1 – this simply means that what would cost $100 in 2002 cost $114.10 in 2008.

Two pieces of data are needed to create the Consumer Price Index; price data and weighting data. Price data is the collection of the goods and services from a few retail stores at a certain time and in various locations. So, this could be getting the price of bananas from four different grocery stores in three different cities in the American Northeast. Weighting data is the estimate of the shares of different types of expense data as a fraction of total expenses covered by the index. This information usually comes from sample decades and sample homes.

Of course, there are limitations to the Consumer Price Index. For one, consumer expenses done in foreign countries are not done, as well rural populations are often not included. As well, the very rich and very poor are often excluded as sample groups. Something that is always excluded is savings and investments, but the cost of financial services is included, as is insurance.

Everything will be weighted differently within the Consumer Price Index as well. For example, on 100,000 items from 20,000 stores and 30,000 rental outlets will be brought together and averaged out so that Housing accounts for 41.4 percent, Food and Beverages at 17.4 percent, Transport at 17 percent, Medical Care at 6.9 percent, Misc. at 6.9 percent, Apparel at six percent and Entertainment at 4.4 percent.

The Consumer Price Index is not something most people will think about, but it gives them a good indication of how their country’s economy is doing.

Australia Travel Blog: The Blue Mountains

Sydney Travel Blog: Part 9 – Blue Mountains’ Stunning Natural Beauty

2-Day Combo: Sydney City Tour + Sydney Harbour Lunch Cruise and Blue Mountains Day Trip

Australia Travel Blog: Sydney City Tour

Day 2 of my tour started right on time when the big, double-decker bus arrived just before 7:25 pick-up time. Today I will be vising the Blue Mountains, which is the main attraction, and then the Featherdale Wildlife Park.

The Blue Mountains are situated within a World Heritage Area and offers spectacular stunning natural beauty. A 140-kilometer walking trail, native bushland, ancient rock formations, long stretches of eucalyptus trees, underground caves, cliffs, canyons, waterfalls, and much more can be found in the Blue Mountains.

The Blue Mountains area has any facility you can think of to welcome tourists. For example, it offers glass-topped railway carriages to ride into the depths of the lush, hidden valley below. This is the steepest incline railway in the world.

There is a cableway offering panoramic views and the skyway that glides between cliff tops. You will watch breathtaking views 270 metres above ancient ravines and the rainforest canopy.

There is another valley floor boardwalk which is goes under a canopy of tall tree ferns.

The Blue Mountains area also has a picnic area, resort, street art walk, restaurants and so much more.

However, due to limited time, I would not able to see anything else beyond what’s already included in the tour.

Before reaching the Blue Mountains, we will stop at a quaint mountain village called Leura. It would take about 2 hours to reach the Blue Mountains. Tiny mountain hamlet Leura was very close to the Blue Mountains.

How Interest Rates Affect Consumers, Investors and Businesses

Interest rates, consumers, investors, and governments

First Published: ADawnJournal.com April 14, 2010

The interest rate of a country is extremely important to the economy. The changing of the interest rate can have a great number of effects on how the economy performs, as well as on the people who benefit or are hurt by the economy.

Consumers

When the Federal government cuts the prime interest rate, it affects consumers as follows:

·   If the government cuts the interest rate, it can lower the cost of getting a mortgage for a consumer. This depends on whether or not the consumer has a fixed or variable interest rate mortgage though. If someone has a variable interest rate, their mortgage payments will go down as the interest rate goes down.

·   The lowering of an interest rate will also help credit card owners. If the rate goes up on a variable interest rate, the credit card owner pays more, while the opposite is true if the interest rate goes down.

·   While cutting an interest rate saves money on mortgages, it hurts a consumer’s savings. Less interest means less money in the bank. When the interest rate goes up, consumers get more out of their savings.

Investors

The changing interest rate will affect investors and make them change their investing habits. Some examples of this with a rising interest rate include:

·   When the interest rate goes up, credit card companies, financial companies, consumer staples and service companies that do not use a lot of debt will be good companies to invest in.

·   Conversely, when the interest rate is up, mortgage lenders, real estate developers and automakers are companies to avoid for investments.

Companies that benefit from high interest rates will typically suffer when the interest rate is slow. Conversely, companies that suffer when interest rates are high will benefit when the interest rate is low.

Businesses

Businesses around the country are significantly affected by changing interest rates. When the interest rate changes, it has an effect on how much, or how little, a company borrows. When there is a shortfall in payroll, or there is a need to buy equipment, a company will often take a short-term loan. If interest rates are high, it will cost the company more to pay back that loan, which can affect the profitability of that business. When interest rates are low, companies can borrow more and not be as hard pressed to pay back the interest.

Business strategy is also affected by interest rates. Since businesses are all about profit, knowing what the interest rate will be on loans is very important. If a company is implementing a new program that will bring in a profit of five percent per year, but interest rates are seven percent per year, then the company should put their money into the bank rather than investing it.

Interest rates are very important for consumers, investors and businesses. When they go up, some areas benefit while others suffer. When the interest rate goes down, other areas benefit while those that benefit on high interest rates suffer.