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Credit and Teens: Growing Up in the Plastic Generation

Credit Wise (featured column)
by Jennifer Wallis

For some parents, teaching their kids about credit may inspire as many sweaty palms as the birds and bees speech. Neither are easy topics to tackle but both are facts of life. You may think that your kids will learn all about credit in school but unfortunately most of you would be mistaken.

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Most schools do not extensively cover the topic of credit in their teaching. If they do, a few hours of credit training may not be enough to combat the deluge of credit card offers teens will soon find in their mailbox or on campus. The best way for your teen to learn how to manage credit responsibly is for you to talk openly and honestly about it.

According to Visa, plastic payments (either debit or credit cards) now account for 50.4 percent of spending among consumers 18- to 24-years-old. In fact, so many consumers in this age group are using plastic that Visa has dubbed them ‘Generation Plastic” or “Gen P”. While debit cards withdraw money directly from a banking account and do not allow accumulation of debt, credit card users don’t show many signs of slowing down. According to the Nilson Report, consumers used credit cards for $1.75 trillion in purchases in 2005. Yes, that’s trillion with a “T” (12 zeroes for us math impaired folks). It may come as no surprise that the age group with the fastest growing number of bankruptcies happens to be 18- to 24-year-olds.

While some see the plastic trend as a positive step, others would rather encourage use of cash. Some claim that using plastic (even debit cards) desensitizes young consumers to using credit cards. Whether you prefer cold hard cash or cold hard plastic, credit is a topic that young people must be well-equipped to deal with. According to Nellie Mae, over 78% of college students have credit cards. One out of 10 carries a balance of more than $7,800.00. That can be a huge amount of debt for a young consumer trying to squeak by on a student’s budget. With so many issues facing teens today, stress over debt doesn’t have to be one of them.

Even though it is possible to recover from bad credit, it can take a while. Most account activity stays on a credit report for 7 years. According to the American Center for Credit Education, a person with a “low” credit score will pay approximately $250,000.00 more in interest than a person with a “good” credit score. Instead of letting your kids make mistakes that can cost years of bad credit and thousands of dollars, it’s important to teach them to make wise credit decisions before they run into trouble.

Unless you have enough money to pay cash for a house and car, most people will need to rely on credit at some point. Give your kids the tools to handle their credit responsibly and make good choices regarding their financial future.

Here’s how to start them out on the right track:

Educate your kids

Consider taking them to a local financial management class. It’s also important to sit down with them and openly discuss any money lessons you may have learned or mistakes that you have made. Good money management is learned behavior, in most cases. Give your kids the tools to succeed.

To co-sign or not to co-sign

Many young people may need help from Mom and Dad to build their credit by asking you to cosign for a loan or credit card. It can be great to help them build a good credit record but it does put your credit at risk if they don’t pay on-time. If you do cosign make sure that your little darling understands that you are putting your credit in their hands. Keep close watch over them and make sure they pay their bills on-time. If you are unsure about them being ready to handle that kind of responsibility, you may want to rethink co-signing.

Encourage saving

As credit card use is becoming more prevalent, each generation is saving less and less. Yet, saving for emergencies and major purchases is the only way to avoid debt. You can encourage your children to save by considering a matching program. Instead of giving teens an allowance, (especially if they work part-time) offer to match the amount that they save. This will reward them for making responsible financial decisions and instill a lesson that will stay with them for life.

Don’t bail them out 

If your child does end up in a financial bind, offer to help them only if they have run out of other options and you believe they have learned a lesson from their financial mistakes. Too often, parents don’t want their kids to “suffer” so they bail them out of every financial problem they ever have. For most, the only way to learn a behavior change is to have to deal with the consequences that come with bad choices. If your kids know that Mom and Dad will save them from any problem they create, they may never learn to make better choices.

While we may not be able to save our children from every financial woe that they will ever face, it is our job as parents to prepare them for life in the real world. Avoiding credit for life is probably not realistic so teaching kids to handle credit well, make responsible decisions, and save for things they want will give your kids the information they need to survive financially once they leave the nest.

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Copyright © 2006 by Jennifer Delcamp. All rights reserved.

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