Kids and Credit Cards

When children go away to college these days, they often carry two “essentials” that weren’t there for prior generations: laptops and credit cards. According to Nellie Mae, the national student loan financing corporation, 83 percent of undergraduates have at least one credit card, and the average balance owed is $2,327.

What’s wrong with this picture? It suggests that young people are ringing up too much debt too fast. It also suggests that they don’t understand some basic concepts about money – not the least of which is that anything bought over time, at interest, ends up costing far more than it should. Impulse buying and overspending — before they are even out in the working world — leave many of today’s graduates with debt they can’t afford and a poor credit rating that could affect their chances for getting hired.

So what’s the solution?

For young adults, and their parents, the solution is in not spending beyond your means and instead learning how to manage credit.

Let’s start with a few basic facts of modern life:

• Children ages six to 17 are spending an estimated five billion hours a year collectively on the internet and shopping is among their favorite activities.
• The vast majority of purchases are made with credit cards at high rates of interest often for short term gratification such as meals from restaurants.
• From an early age, children are using their parent’s credit cards, not realizing that these are debts that must be paid off.

For parents, the challenge is helping their children understand the value of money and credit, regardless of its form. Here are some suggestions to start them early:

1. Require kids to pay back any card purchases in cash or ask for the money up front before they use the parental card. Or, wait until the statement comes in to show them the added cost of the items if interest is added by not paying it off entirely.
2. If children don’t pay the parent back on time, add the interest to their bill. Help them learn that late payments have negative consequences.
3. If they are unable to pay a parent for their purchase in full, cut off their “credit” for future purchases until the balance is paid. This teaches patience and helps them to understand you can’t always have what you want immediately. A lesson in impulse buying that even some adults need!
4. Some banks issue limited cards to minors with a parent co-signer. Some parents believe that issuing the card in the child’s name helps them to feel the sense of ownership and accountability.
5. Emphasize that credit is personal and cards should never be shared or loaned.
6. It’s important that children learn that credit is a privilege, not a right. If they use it unwisely, cut it off to show them that it is a privilege worth protecting.
7. Model good behavior. Avoid impulse buying in front of children and don’t carry a balance higher than you can afford to pay off. Children learn what they live.

In the modern world, it’s realistic to think that when you child goes off to college, he or she may have at least one, limited credit card. The goal of educating children about credit is to send them off with the tools necessary to use that credit wisely and not owe an arm and a leg on top of the student debt that most graduates will live with for a long while after graduation day. Their employment opportunities could depend on it.

Article by Tim Ehlers.

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