Don't Let Your Teen Get Caught in
a Credit Crunch
When is it best to teach your children about using
credit and borrowing money wisely? The Iowa Society of Certified Public
Accountants advises that the teen years are a great time to introduce
children to the rules for managing debt.
Don’t miss out on the opportunity to broach this
important topic. Young adults are swamped with advertisements for credit
cards as soon as they enter college, and many don’t know how to say “no.”
It’s estimated that undergraduates are carrying an average outstanding
balance on their credit cards of $2,100. Between credit card debt and hefty
student loan balances, young people often struggle to cover all their
payments.
Explain the good, the bad
Let your child know that there’s nothing wrong with credit. It’s a useful
tool that can make it possible for people to buy a home or finance purchases
of cars, appliances–even a child’s college education. However, remind your
kids that this privilege also comes with a responsibility to spend wisely
and make the necessary payments when they come due.
Interest rates, payoff dates
The next time you receive a credit card offer, sit down with your child and
explain how it works. In particular, show him or her how to find the
interest rate and any other fees associated with the card. Explain that if
you don’t pay off a balance immediately, anything you buy will eventually
cost you more than the sticker price because of the interest charged.
Calculate the difference
Your next step is to show them how interest works. Many online sites contain
calculators that reveal the real cost of debt and how long it takes to pay
off a purchase if you pay only the minimum amount due. Your teen will
quickly see the cost of charging a purchase rather than paying it with a
debit card or cash.
Try it out
After you’ve explained interest rates and shown some examples of how they
work, let your teen test out a credit card. One way is to get a prepaid
spending card that your teen can use to spend a limited amount and no more.
Next time you go clothes shopping, hand your teen one of these cards and let
him or her make decisions about how to spend the preset amount. It’s a great
way for your teen to learn how to budget while becoming familiar with using
a credit card. Another advantage to these cards is that there’s no interest
on your purchases, since they are paid for in advance.
Use the best resources
The 360 Degrees of Financial Literacy program–a public service effort
created by the CPA profession–has a treasure trove of information on
teaching your children to spend wisely. The “Childhood” section of the Web
site, www.360financialliteracy.org, contains articles on topics such as
teaching teens about money, investments, and how to manage their summer
earnings.
And don’t forget to consult your local CPA for any
advice you need on financial issues facing your family. The teenage years
are the best time to teach your children about using debt wisely, and your
CPA can offer the advice you need to help them get the right start. Some
helpful ideas from an expert can prevent bad spending decisions later on in
life. To access “Find a CPA” on the web, go to
www.findanIowaCPA.com.
