Explaining credit to a 6-year-old is one thing. Teenagers, well, they're a different species entirely. A reader recently wrote asking for advice on instilling some common-sense money lessons into her children. That is, older, somewhat disinterested teens. Here's what she wrote:
I opened my own savings account at age six, practicing on sheets and sheets of paper until I managed to get my signature small enough to proudly fit it on the dotted line when opening my account. However, my kids (a daughter and son, 14) never caught on to my enthusiasm.
I've spent the last 17 years of my daughter's life protecting her from predatory credit card services. But now that she is "all grown up," how do I send her off to college with her own workable account and a credit card that works for her?
Dear Nervous Mom,
Sounds like you're doing a great job. You'd be surprised by how many parents aren't even aware of the money hazards awaiting their precious little ones. So, kudos to you for being concerned about the right things.
As a child of a nervous mom, I can relate. I'm thankful she set aside her anxieties enough to let me remove the protective goggles during my cello lessons.
But your days of carpooling and vetting credit card solicitations for your daughter are coming to an end. Trust me, no amount of Kevlar can stave off the on-campus co-eds handing out free T-shirts/pizza/football phones to hawk credit cards. Readying your kids -- er, little "grownups" -- for the real world of money management requires a bit of education and an ounce of restraint by both you and your offspring.
Unfortunately, restraint isn't what most lenders have in mind for college students. A study released last year by student loan lender Nellie Mae found that 54% of freshmen have a credit card. By the time they are sophomores, 92% of co-eds are packing plastic.
Evidently, the kids are using them, too. According to Nellie Mae, undergraduates carry an average credit card balance of $2,327, with 21% burdened by balances between $3,000 and $7,000.
Whew, that's a lot of pizza and Greek letter action wear!
Ignore the eye rolling
Let's not put all the blame on the industry, though. A credit card can be a convenient tool, but it's up to the user not to abuse it. No matter what enticements are thrown her way -- including convenience checks, raised credit limits, free Frisbees -- it's up to her to set her spending limits.
And that's where you come in, teaching your daughter the difference between wants and needs, emergencies vs. frivolities. Money may seem like a conversational third rail with your teen, but it sure beats having to bail her out of debtor's prison or a waitressing job at Shooters. Consider opening up your checkbook and sharing your budget with your kids. You are not a human ATM. You have to work to afford the rent or mortgage and after-school snack food.
It might seem like you're talking to a lip-glossed wall when you relay the money issues you face in your day-to-day life of being a single mom. But, believe me, some of it is sinking in.
You can touch on all of the relevant issues -- credit management, budgeting, saving -- but in the end it's firsthand experience that will reveal your parental genius to your child. The life experiences gained in college -- even the painful ones -- are priceless.
Dear student, you're approved!
If you're wondering what will happen after you drop your daughter off at her new dorm, here's a likely scenario: She'll be approved for a $500 line of credit based on her future earning potential and what lenders deem your financial strength and protective maternal instincts.
While that $500 credit limit may seem reasonable at first, she'll soon learn that the borrowing well runs much deeper. Her account statement will contain a CliffsNotes lesson on the ways of the lending industry when she's offered a higher credit limit, convenience check, or cash advance. "You deserve it!" the mass mailer will say. Of course, she does, after pulling that all-nighter!
Even if her lender imposes some credit limits, once she becomes a credit card-carrying citizen, other suitors will start lining up. In Nellie Mae's study, of the students with credit cards, 47% carry four or more cards. As long as she's 18, she can get a credit card without a co-signer.
Special "student credit cards" are marketed and supposedly designed with students in mind. Though in my brief survey of the "benefits for students," I found them far from student-oriented. Things like online account access and reward points are pretty much standard fare on most credit cards -- even ones for us grownups. And while a card emblazoned with her alma mater (or Fool logo) is quite fetching in that faux zebra pocketbook, she shouldn't fall for a card just based on looks.
Probably the best bonus a co-ed can get from a credit card is establishing a good credit record. If nothing else, remind your little scholar that punctuality counts. In fact, one's payment history (if you pay your bills on time or late) makes up about 35% of your credit score. Get it wrong by missing payments or spacing out on buying stamps and mailing them three days late, and prepare to get hit with up to a $35 late fee and a long-standing bruise on your credit record.
Parents can avoid the credit card scenario altogether with one of the new pre-paid gift cards. (CardWeb.com publishes a list of current offerings.) It works like a debit card in that you load it with cash, and after Junior spends what's there, it's gone. No bills to pay. But also no credit history and responsible habits established.
While the kids are still under your roof, there's no time like the present to get them motivated about money. Your son may seem nonplussed by Mom's enthusiasm for the topic. But how does he feel about being a millionaire?
Yeah, that's what I thought.
Our Teens & Their Money area is designed for similar-minded kids. (While it might be difficult to force your offspring to check it out on their own, perhaps you can "accidentally" leave it on the computer at home for them to see.) It offers firsthand advice -- True Teen Stories! -- from the mouths of babes themselves. Until this stuff is required reading in schools, it's up to parents to pass on their words of wisdom (and perhaps The Motley Fool's Investment Guide for Teens and a printout of the college-oriented "10 Steps to Financial Freedom").
And if that doesn't work, remember that some of the best lessons are learned after making a few money mistakes on your own. By keeping the lines of communication open with your kids, you'll be privy to potential problems before they get so out of hand that your daughter tries to auction off her cello goggles during recess.
Dayana Yochim still flinches during particularly aggressive cello concertos. Her vital signs are monitored here. The Fool's disclosure policy is music to the ears (of lawyers, mostly). This column originally ran in March.