It's not only possible — but crucial — to teach teens good money habits before they go to college

For a generation where "cash is so five minutes ago" and 18-year-old basketball stars flout $90 million sneaker deals, old school values like saving and long- term planning can seem pretty fuddy-duddy. But with debt and personal bankruptcies for young adults rising at alarming rates, teaching financial literacy to our kids before they go off on their own could save them from a future of stress and frustration.

"Plastic Money" Doesn't Come Cheap

Giving young people unfettered access to easy consumer credit — before they have demonstrated the ability to manage a personal budget or obtain a full-time job — can create a host of emotional and psychological problems. The unrestrained use of "plastic money" can fundamentally undermine teens' cognitive ability to understand the relationship between income and standard of living. Poor payment habits can also lead to abysmal personal credit reports with shocking results for naive twenty-somethings: rejections for apartment rentals, home mortgages, auto loans, car insurance, graduate school loans, professional school admission, and even jobs.

Twenty years ago, who could have foreseen that college graduates would have their consumer credit scores scrutinized as carefully as their GPAs? So much for American Express saving the day. (Do teenagers wonder if Jerry Seinfeld has a problem paying his credit card bills?)

With credit lines and material expectations progressively increasing on American campuses, many teens now view consumer credit as a social entitlement rather than an earned privilege. A recent Citibank/Sony Visa campaign promotes credit cards as the "Currency of Fun," offering electronic gadgets as rewards for high levels of purchasing — implying that the more you spend, the more "fun" you will enjoy and the more "toys" you will receive. Conversely, limiting access to material goods is portrayed as depriving students of their right to pursue happiness through shopping.

Credit card companies encourage fantasies of easy money because students are so profitable: teens have financial naivete, high material expectations, responsiveness to relatively low-cost marketing campaigns, high potential earnings, and future demand for financial services. Not surprisingly, companies are approving credit lines for students at progressively earlier ages, including high school seniors. Most college freshmen now receive their first credit card before taking their first mid-term exam. Cross-marketing with retail affiliates (such as Visa-issued Gap cards) make impulse shopping even easier.

The Campus Gold (and Platinum) Rush

Since the onset of banking deregulation in 1980, the increasingly concentrated U.S. financial services industry has become more dependent on high-interest revolving credit card loans, which are about three times more profitable than the average banking product. The top 10 banks now control over four-fifths of the credit card market (compared to less than one-fourth in the late 1970s), and these trillion-dollar conglomerates are less cautious with their lending policies than the community banking systems they supplanted.

As profits from revolving debt escalated in the late 80s, the institutional pressure to expand credit card portfolios intensified. Banks began strategizing over how to penetrate the desirous but risky college market. Financial institutions learned that excluding parents from the credit approval process was a lucrative policy that increased students' discretionary purchases, leading to mounting finance charges and fees. By the beginning of the 1989-91 recession, about one-half of college students at four-year institutions had their own credit cards, but few had accumulated over $5,000 in revolving debt. This quickly changed as banks marketed credit cards to juniors and sophomores. By the late 1990s, over 70 percent of college students at four-year institutions had credit cards and banks commonly marketed them to freshmen. With more time to accumulate debt and much higher lines of credit, students began amassing much larger debt burdens, with $15,000 to $20,000 in cumulative "plastic" balances a not uncommon experience.

College administrators have not been passive bystanders. Marketing agreements have proliferated on college campuses which grant credit card companies exclusive promotional access to students in exchange for millions of dollars. This is especially common at public institutions, since the largest 250 public universities account for nearly two-thirds of the students at four-year institutions. It is noteworthy that none of the "royalties" from these lucrative contracts have been used to fund financial literacy or debt consolidation programs.

Today, three-fourths of college students have bank-issued credit cards. And, at public institutions, students commonly use their college loans (whose repayment schedule is deferred until after graduation) to pay down their monthly credit card balances — a perverse form of a savings account. This trend is encouraged by the largest credit card issuer and student loan provider, Citibank, which essentially reduces its risk by encouraging students to shift their high interest credit card debt into low-interest, federally guaranteed college loans. It should not be surprising, then, that combined student loan and credit card debt levels are ascending to new heights. In a 2001 survey of its student loan borrowers, Nellie Mae found that the average combined student debt was $20,402 — including $17,140 of student loans and $3,262 of credit card debt.

Of course, access to consumer credit cards need not entail student debt problems. If students understand the cost-efficient use of bank credit cards, having them at an earlier age may actually result in fewer debt problems later on.

Less Plastic and More Freedom

It is imperative for parents to discuss the potential social and economic consequences of debt-based consumption with their children as soon as they are able to recognize the advertising messages that define the pop culture of their youth. Persistence and determination are needed to counteract these pervasive messages of instant gratification — but it is possible to break the cognitive chains that associate "fun" with purchasing more "toys."

You can emphasize the positive power of savings to kids at a very early age. Encourage or enforce a savings plan with young children, such as putting 20 percent of his or her allowance into a special bank account, to demonstrate that spending is linked to the money he or she has available. Calculate the cost of a desired activity or toy in terms of the number of weeks your child must wait to earn it with savings. The child may become frustrated by this process — especially if he or she is accustomed to mom or dad buying the toys — but it will be more significant to the child through the process of using his or her own money, and waiting to earn it teaches the power of delayed gratification.

As children enter the early teen years, many will want credit cards — especially since credit is commonly used to facilitate online transactions. Before jumping into the world of credit with your child, establish a joint checking account as a reward for attaining earlier savings goals. Teach him or her how to balance a checkbook, emphasizing that this convenience requires a great deal of personal responsibility. Just like saving up allowance, the money can only be spent if it is available — do not permit the bank to offer overdraft protection. Monitor how your child handles this responsibility. If you are satisfied with your child's spending habits, you may consider a check-cashing or debit card in the early teenage years to access the checking account.

As your teen assumes greater responsibility with money — and perhaps with other duties, such as household chores -- a credit card can be a good option, if chosen and monitored carefully. There are many forms of pre-paid bank cards which function like debit cards and teach kids that deferring payment is not the same as having "free money." It is important to demonstrate that the power of credit can quickly exceed its convenience through high cost finance charges and fees. Use a calculator (such as the "Debt Zapper" — see sidebar) to show the real cost of purchases on a card with a revolving balance, and how increasing monthly payments and lowering annual percentage rates will lower overall costs. The key is to emphasize that impulse buying on credit entails paying more later — sometimes much more — which can mean painful future sacrifices.

In addition to chaperoning your child through different financial lessons, it is important throughout this time to discuss the temptation of money, the lure of advertising, and the blurring of "needs" with "desires." Balance savings objectives with rewards for meeting specific goals, discuss money matters clearly and often, and of course, model responsible habits in your own financial life, or many of these lessons will be lost.

Today, the mantra of "buy now, pay later," is portrayed in the mass media and popular culture as the new values of the "Just Do It!" generation. Too often, financial irresponsibility is portrayed as a benign rite of passage as our youth make the transition to the personal responsibilities of adulthood. In reality, many youth find their personal relationships and professional careers ruined without an informed view of the power of plastic. By equipping our teens with appropriate financial skills, we can replace the seduction of "stuff" with the rewards of personal empowerment and self-fulfillment.

Robert D. Manning is a University Professor and Special Assistant to the Provost at the Rochester Institute of Technology. He is the author of Credit Card Nation and the forthcoming Give Yourself Credit! He frequently testifies before Congress in defense of citizen consumer rights and serves as an expert witness in federal and civil suits against the credit card industry. He is also President of Newtonian Finances, Ltd., an education and research firm which will introduce financial literacy/credit card education programs in several colleges this fall.

Online Financial Resources

Whether you're finding ways to teach money skills to your kids, helping someone get out of debt, or looking for ways to reduce your own bills, many great debt- prevention resources are available at Dr. Manning's web site,, including:

  • "Debt Zapper" calculator. Helps calculate the true cost of credit cards with finance charges and fees, and helps demonstrate how paying more than the  minimums and finding cards with lower annual percentage rates can significantly  lower costs. "Budget Savior" estimator: Helps students create realistic post-graduation budget plans based on estimated income, the cost of rent and bills, and student loan and credit card payments. Quizzes on financial literacy. Not just for students! Information on how to compare credit card offers.
  • Reports on use of credit cards on college campuses.

Even if you don't surf the web, you can read up on credit card practices and how to teach kids of all ages good financial habits. Many helpful books are available, including: Debt-Proof Living and Debt-Proof Your Kids by Mary Hunt, The Kid's Guide to Money by Steve Otfinoski, and What Kids Really Want That Money Can't Buy by Center President Betsy Taylor.