By Doug Hall
When children go away to college these days, they often carry two essentials that weren’t available to prior generations: personal computers and credit cards.
According to Sallie Mae, 56 percent of undergraduate students owned a credit card in 2016, compared to 30 percent in 013, and 85 percent carry debit cards.
What’s wrong with this picture? It suggests that young people are ringing up too much debt too fast. It also suggests they don’t fully understand some basic concepts about money — not the least of which is that anything bought over time, at interest, ends up costing far more than it should.
Impulse buying and overspending, before they are even out in the working world, leave many of today’s graduates with debt they can’t afford and a less than attractive credit rating.
So what’s the solution?
For children (as well as adults) the solution is not spending beyond your means and learning how to manage credit.
For parents, the challenge is helping their children understand the value of money and credit, regardless of its form. Here are some suggestions:
Require children to repay any card purchases in cash. Some parents ask for the money up front (before the charges are actually incurred), but another idea is to wait and show the child his or her items on the credit card statement. This allows children to see the actual cost of what they purchased — and the interest that will be added to the purchase if they don’t pay the amount in full.
If children can’t repay card purchases on time and interest accrues, add it to their bill. This helps them understand the cost of paying over time.
If they are unable to pay for their purchase in full, cut off their credit for future purchases until their entire balance is paid. This will help them understand that they can’t always buy what they want when they want it.
Some banks offer credit cards to minors with low credit limits (guaranteed by a parent or accompanying bank account). Some parents believe that teenagers take personal credit more seriously when cards are issued in their own names.
Debit cards and prepaid phone or merchant cards can also help educate children about credit. The pre-set limit on these cards prevents overspending.
Emphasize that credit is always personal and cards should not be shared or loaned.
It’s important for children to learn that access to credit is an earned privilege, not a right. Parents can reinforce this by cutting off credit when children use it unwisely.
Model good behavior. Avoid impulsive card spending in front of children, and don’t carry more cards than you need or a higher balance than you can afford to pay off.
In the modern world, it’s realistic to think that when your child goes away to college, he or she may have at least one credit or debit card. The goal of educating children about credit is to send them off confident that they won’t owe an arm and a leg soon after.
Doug Hall is a senior partner at 1847 Private Client Group in Conshohocken.