Whether we want to admit it or not, teens are playing an increasingly important role in the U.S. economy. According to PBS, teens are expected to spend up to $155 billion in 2014, a 55% increase from the $100 billion they spent in 2009. Retailers are certainly doing what they can to reach this free-spending group of consumers, but so are credit card companies.
Teens and credit cards: a dangerous combo
As I recall my first year of college following my 18th birthday, I received no less than two credit card offers a week for months on end. Credit card companies understand that credit is a practical necessity these days for teens because the probability of walking up to a homeowner and buying a home with $300,000 in cash is pretty slim. Without credit large purchases could be difficult, if not impossible, to attain, while landing a job or renting a home or apartment could be tough since your credit history can factor into the decision-making process.
However, the fact remains that teens are pretty naive when it comes to credit cards. A 2011 survey from Charles Schwab noted that while more than two in five teens already have a credit card (either a student credit card or perhaps one in their parents' name), just 35% felt confident that they understood how credit cards worked. Furthermore, one in four teens believed a debit card acted as a credit account with the bank rather than a bank card linked to their checking account.
Key credit lessons to teach teens
The importance of teaching teens good credit habits simply can't be overstated. With that in mind, here are the five crucial lessons we should be teaching teens to set them up for success when using credit.
1. Understanding the value of a dollar
Perhaps the toughest lesson to teach teens is the value of a dollar. Many teens aren't working as they're focused on school and they may have the perception that simply swiping a card through the credit card reader gets you anything you want. Because of this they have a hard time making the connection between money being spent and using a credit card.
Teens need to be taught early and constantly reminded that credit is debt. This means teens need to understand the idea that just because they have spending room on their credit card it doesn't mean they have to utilize it.
A potentially easy way to convey the value of a dollar to teens, and to get them to use their credit wisely, is to remove cash from their checking account, or directly from their person, for each corresponding dollar they spend on their credit card. This way there's a tangible connection of how much they're spending and they'll likely make wiser decisions as to whether or not a product or service is worth buying.
2. How credit card interest and fees work
Secondly, it's evident from Charles Schwab's study that most teens don't have a good grasp of how credit card interest and fees work, so this would be the next most important topic to tackle.
Teens need to be taught that what they purchase can actually wind up costing a lot more than the sticker price over the long run if they only plan to make the minimum payment on their credit card. Because teens are unlikely to have much if any credit history, credit companies are unlikely to give them an attractive APR, making it critical that they understand the connection between interest, time, and how much they choose to pay on their bill.
Under the Credit CARD Act of 2009 credit statements are required to have a minimum balance warning to demonstrate to consumers how much they'd pay in interest if they just made the minimum payment. This can be an important learning tool for teens.
3. How their credit score can affect them
Once teens have a good grasp on the true value of a dollar and how credit card interest and fees work it's time to teach them why making their payments on time and maintaining good credit habits is so important.
In addition to teaching teens the basics about the credit score system, they should be taught about how lenders will use their credit history to determine their interest rate and available balance. Teens also need to understand that their credit score can affect more than just their ability to get a new credit card or obtain a mortgage. As was noted earlier, employers and landlords will often look at an individuals' credit report to get a bead on their trustworthiness. An individual with a lower score may be viewed as a risk and could lose out on a good job or a favorable apartment or home.
4. Not all debt is bad debt
Although it's important teens understand the seriousness of using credit to make purchases, they should also be taught that not all debt is necessarily bad.
For example, teens or their families may not have enough cash on hand to pay for the rising cost of a college education. This means more teens than ever are applying for student loans to get through college. According to The Project on Student Debt, 69% of seniors who graduated from public and nonprofit college in 2013 had some form of student loan debt, with the average student loan equaling $28,400.
While no debt is welcomed with open arms, a student loan could be a path toward a better paying job and career advancement. The Pew Research Center noted earlier this year that Millennials aged 25-32 with a Bachelor's degree or better earned a median of $45,500 per year in salary compared to just $28,000 for millennials of the same age group that only had a high school diploma. A good education could easily cover the cost of a student loan, making a student loan a potentially smart move.
5. How to protect their information
Finally, considering the number of credit card breaches we've learned of from major corporations over the past year it's definitely worth teaching teens how to safeguard their information.
For instance, Facebook and Instagram are popular stops for teens these days who want to express to the world the ups and downs of their day. Some might even be tempted to post their accomplishment of obtaining their first credit card online with a photo -- a potentially dangerous idea that could wind up with their account information being stolen.
Another common method of account information theft is credit card offers being thrown in the trash. Thieves can very easily pull your info from these offer sheets and open an illegal account in your name. The easy solution is to teach teens to shred all credit card offers.
It's also a smart idea for teens and their parents to go over their credit report at least once a year and look for discrepancies. Even if identity theft isn't a problem, it's quite possible that credit reporting agencies can make mistakes.
There are no guarantees that teaching teens these five crucial lessons will set them up for credit success, but if more teens were taught these steps early there's a very good chance that future generations would wind up with higher credit scores and better spending habits.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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