If you have children nearing college age, how can you effectively warn them about the dangers of credit card debt? Let's review a few things you might want to mention.
Your kids already know college can be great. They won't have parents nagging them with curfews. They can eat ice cream for breakfast and popcorn for dinner if they want. And America's banks keep offering them credit cards!
Now, fast-forward your kids to their graduation. They've racked up $5,000 in debt on one of those credit cards. Of course, they aren't worried -- their minimum monthly payment is only 2% of the balance, or just $100 per month. But have them consider a few things: When they signed up for the card, it offered a low 6.9% interest rate. But did they notice that the rate swelled to 18% after six months? Sneaky devils, those card companies.
Now, even if they don't accumulate any more debt on that card, it can take more than 40 years to pay off the balance if they make only the minimum payment. Holy guacamole! All told, they will have paid nearly $18,000 just for the privilege of charging $5,000. No wonder the banks keep sending them unsolicited credit card applications.
Here's another danger. Let's say your kids are fired up to invest in stocks, but they still owe that $5,000 and are paying 18% annual interest on it. If a $5,000 stock investment nets them an 11% return, they're still losing money -- 11% in, 18% out. Investing doesn't work well if you're deep in debt at high interest rates.
Don't worry, though. We're not going to tell anyone to use credit cards only as shoehorns, eye patches, and after-dinner snacks. It's OK to have a credit card. Just make sure (and this goes for everyone) that you're charging only what you can afford to pay and that you pay the bills off in full each month. Choose your cards carefully. Use an electron microscope to read all of the fine print. Look for cards that offer a low interest rate, no annual fee, no unreasonable penalties, and a protected, interest-free grace period. Then, when the bill arrives, take five minutes and scrutinize your statement for any mysterious charges.
Finally, if you find it difficult to manage a revolving-debt card, consider getting the type of charge card that requires full payment each month -- like an old-fashioned American Express card.
The typical American household owes thousands of dollars on credit cards. Be above average, college-bound Fools. Graduate without credit card debt.
You can learn much more about the surprisingly interesting credit card industry by taking a peek at our Credit Center, which also features tips on getting out of debt, along with guidance on how to manage your credit effectively. Really. I mean it. There's some great stuff in our Credit Center, and it's all free reading.
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