For 21st century teens, credit cards have become a rite of passage – like cell phones and drivers’ licenses. Teens are quickly becoming one of the largest target markets for credit card companies, with more and more youth culture campaigns popping up each year. That’s because credit card companies know that teenagers are consumers, forming one of the largest population demographics in the country and spending upwards of $200 billion annually. But, with a global credit crisis underway and teens racking up more debt than ever, how can parents ensure that kids are prepared for the spending power of plastic?
The U.S. Census reported the amount of credit card debt outstanding in 2006 had reached a total of $886 billion and the projected amount of credit card debt outstanding for 2010 is a whopping 1.2 trillion dollars - nearly a 50% increase in credit card debt over the course of four years. And, while the need for financial education and fiscal responsibility among kids and adults alike has never seemed more important, the financial know-how of American teens is falling, while their use of plastic climbs. One study by Jump$tart Coalition for Personal Financial Literacy found that almost 35 percent of high school seniors use a credit card, but that non-credit card users were more financially literate than those who pay with plastic.
The good news is that more people are realizing the importance of educating today's youth about financial responsibility. Chad Foster, author of Financial Literacy for Teens, reports that a record 21 states are now mandating personal finance education in public schools. “We must break the cycle of financial illiteracy,” says Foster, who stresses that education is the key to ensuring kids' fiscal responsibility and security. And lawmakers are stepping up to the plate.
On May 22, President Obama signed the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009 into law, which seeks to change the ways in which credit cards are marketed and managed. The law bans unfair rate increases, requires plain language in plain sight for disclosures and agreements, increases accountability, and institutes protections for students and young people. Among the many provisions included is a section addressing age restrictions, banning credit cards for people under the age of 21 unless they have an adult co-signer or are able to show proof of funds required to pay off debts. Moreover, college students are now required to get permission from their parents or guardians to increase credit limits on joint accounts they hold with adults.
While the new law institutes a number of protections for students and young adults, it's still more important than ever that your child learns how to be credit card savvy. Want to get started? Here are 7 tips for how you and your child can jump start a valuable financial education together and build a solid foundation for the future:
- Start Talking. It's important that teens understand how to live within the constraints of their financial realities. John Parfrey of the National Endowment for Financial Education's High School Financial Planning Program says parents should talk to their children about the difference between needs and wants and the concept of delayed gratification. It's important to emphasize living within your means, he says, and never charging more than you can pay off at any given time. That means that credit cards should be used only as a supplement to cash, not as a substitute.
- Debit or Credit? Laura Levine, Executive Director of Jump$tart Coalition, urges that parents and kids be careful not to think of debit cards and prepaid credit cards as “credit cards with training wheels,” because these kinds of cards don't give kids the relevant experience with credit they need (such as monthly payments, interest rates, late fees, etc.). But Parfrey argues that starting your teen off with a prepaid credit card has the potential to help your child gain valuable experience with important financial concepts without all of the risks. No matter what kind of plastic first falls into your child's hands, however, there must be a healthy balance between parental involvement and teenage independence.
- Is Allowance Allowed? An allowance is a great opportunity to introduce your child to the world of money, while keeping it relevant to her life. Foster stresses that when doling out allowance, it's important to make a correlation between money and value, relating your kids' new-found funds to something real by giving an allowance as payment for a task completed such as taking out the trash or simply keeping the bedroom clean.
- Hard-Earned Lessons Kids who work a part-time job throughout their academic careers are better prepared when it comes to financial literacy. “It's imperative that teens work part-time,” says Foster. “It's an experience that enables them to earn money that's their own, and learn how to manage that money.” Once the money in their pockets is money that they've earned, kids start thinking twice about what to do with it.
- Start Asking It's important to provide your child with the time and space to ask questions and to answer some, too. Levine suggests sitting down and reading the first statement (whether it's for a credit, debit or savings account) together, then asking your child some questions. Going over each and every purchase your child makes is not the purpose of this time together; you don't want to make your child feel like you're invading her privacy. Instead, ask her questions such as what she thinks an appropriate monthly payment might be, what an interest rate is, and what she thinks the difference is between having credit and accruing debt.
- Make a Spending Plan Foster also emphasizes the importance of making a “spending plan,” which might be a lot easier for your teen to swallow than the word “budget.” Teens need to practice “watchful spending,” says Foster, “and track every dime they spend.” Over a period of ninety days or so, they will be able to see where their money went, and will then be able to make important judgment calls and decisions about the smartest way to spend their money in the future. With a spending plan, your teen will learn financial responsibility while still maintaining a sense of control over her own life.
- “Building” Credit Nowadays, there can be pressure on teens to start “building their credit” early so that by the time they rent their first apartment or apply for their first loan, they've got something on record. But both Levine and Foster argue that “building credit” is a concept that's largely misunderstood. Foster argues that teens need to have a good payment record (a record of buying something and paying for it) as opposed to having a record of debt. A good payment record does not necessarily mean a credit card; it can be anything from a cell phone bill to a car insurance statement. Levine says that what's most important is that teenagers understand enough about building credit to know what will hurt their credit, but they don't need to be actively and purposefully “building” their credit. More importantly, teenagers should know the crucial difference between credit, which is the amount of money you have available “on loan” and debt, which is the amount of money you owe.
The most important thing parents can do for their kids' financial future is to set a good example. “First and foremost, parents need to be role models,” says Foster. “Kids are looking at their parents today (in the midst of this financial crisis) and they are seeing poor spending habits, seeing them with mortgages they can't afford, swamped in debt and spending beyond their means and this is what they're being taught.” Levine agrees: “Parents need to remember that they are the first and best teachers about money,” says Levine, who says that even those parents who have made financial mistakes of their own can still positively affect their children's financial education.
“Parents are in a position to do an awful lot other than simply teach,” says Levine, who says that going to school board meetings, voting in your local elections, and meeting with teachers are all ways parents can incorporate financial literacy into their children's lives. You don't have to be a CPA to set your child on the path to economic enlightenment. There are things you both can do to ensure that if and when she does get her hands on some plastic, she knows how to use it.