Just as with drugs, the pleasures of credit are flaunted while the dangers of debt are downplayed or ignored.
Imagine if a drug dealer set up a table in your local grocery store or at the farmer’s market. Get the picture of the drug dealer giving away free t-shirts or coffee mugs if you try out their product. Would you blithely send your teen over to the table to sign up?
Well, that is what you are doing if you don’t give your child an extensive understanding of how credit works.
Credit Card Debt. So easy to get into. So hard to escape.
The minute my kids hit 18 years of age, the pre-approved credit card applications started to come in the mail. They get at least one a week and sometimes more. The credit cards come with a 0% introductory interest rate for the first six months and then zoom up to 27% (in the small print).
But, whoa. At the age of 18 aren’t most kids still in school? How is it expected that they will pay back this debt? Obviously, it’s assumed (by the banks) that it won’t be easy to pay back. The proud new credit card owners will spend up to their limit with the 0% interest rate and when the introductory period is over, the monthly minimum payments will be mostly interest.
Recently I helped a 19 year old (let’s call him “Sam”) who has managed to get himself into $6,000 of credit card debt in just 6 months. Sam has no steady job and no means of paying back this debt.
When I interviewed Sam, who is otherwise a cautious and conservative person, on what he was thinking while using his new credit cards to buy things, he told me that he “didn’t really think about it.”
Sam said these things about his credit card debt:
- He didn’t understand how credit cards worked.
- He figured he would get a job soon and be able to pay it back.
- He knew he was going to have to pay back the money, but didn’t understand that there were minimum payments.
- He had no idea that there was such a thing as a credit score.
- He didn’t know how a good or bad credit score would affect his future life.
And believe it or not, the understanding of this subject is NOT covered in most (if any) regular school curricula. That means that the education of kids on the subject of credit falls on the shoulders of parents. This is a big subject. Where to start?
I suggest starting by watching the documentary, Maxed Out. Watch the trailer for the documentary above.
It’s powerful (some kids commit suicide because of their credit card debt), and I guarantee it will stimulate conversation with your teen if you watch it with them. You can buy, rent or stream the video from Amazon here. It is also currently available on Netflix. Watch it!
The banks make the offers because when a child reaches the age of 18 they are considered adults an can be held responsible for any debts that they incur. The banks will make a fortune on the interest these 0% interest accounts will accrue at the end of the promotional period. If a minimum payment is late, there will be late charges and the full balance will be subject to the higher interest rate immediately.
At 18 these now adults can legally sign contracts and prevent any other person(s) including their parents from gaining access to any of their records including medical records. They are legally free to make any good or idiotic decision and their privacy is protected. The only thing that they cannot do at 18 is drink.
Jen Y says
We are foolish to leave our kids’ financial education to the schools – ultimately all of their education is the responsibility of the parent to at the very least make sure they are learning what they need to know whether we teach it make sure someone else is. We KNOW they will be legally responsible at the age of 18 so why do parents wait until then to teach this?
We started with our preschooler teaching basic money vocabulary, by elementary age he was learning the worth of money & by high school he was helping balance the family budget. By 19 he had negotiated buying a car without ‘adult’ help & set up his 401k; applied for, received & paid off his 1st loan by 20. By 21 he has bought his 1st house. His credit rating is almost as good as ours – the only reason it isn’t higher is because he just hasn’t lived long enough to develop a credit history.
He’s no different than any typical 21 yr old except the fact that he was taught when he was young & allowed to make choices in high school under our guidance – to figure things out & learn before he could make serious financial mistakes. Most kids could do the same if given the tools. We give them a great handicap if we neglect it.
Bargain Babe says
@Jen Y You have an exceptional son! And you and your husband did an exceptional job teaching him about money. I’m impressed that you started so young – but of course it makes sense. If you teach a child that budgeting and being aware of spending and saving is normal from a young age, it’s a lifelong lesson and becomes part of their personality. So far with our toddler we’ve started talking about buying things on sale and using coupons. But she doesn’t understand money or it’s value. She just thinks we go to the store and pick out what we want!
How did you educate your son about money without him feeling the stress of making big decisions and worrying about not having enough money?