Never before, in this history of this planet has a generation of children been so focused. This is a direct result of parents, who believe that meritocracy, will give their children the best of the best including the chance to achieve great things.
Yet, they are surprisingly undereducated group when it comes to the basics of capitalism. In fact, Jump$tart Coalition for Personal Financial Literacy, a non-profit company surveyed over 700 12th graders about such topics as savings, retirement planning and most importantly, credit cards. Surprisingly, the group not only received a falling grade, they did dramatically worse than a similarly tested group three years earlier.
While the lack of financial education in schools can often be blamed for this financial illiteracy, parents, who are usually footing the bill, are the best educators when it comes to money.
Credit cards used to be the right of passage into adulthood, but increasingly, parents are allowing their children access to them as early as high school. By the time college rolls around, 90% of the incoming sophomores will have at least one card in their wallets.
Before we talk about credit cards, let's take a look at some of the key things you should teach your child about handling credit and how credit card companies view this growing segment of the population.
First and foremost is when to use the card.
As parents, we are the first line of instruction and usually the most unaware. If you are the type of person who finds the use of plastic a problem, your child will probably have picked up on that habit, often unwittingly. By the time they get their first card, expect them to mimic your habits.
Among teens and college-aged students, this buying will usually take the form of competition. There was a time when we called it "Keeping up with the Joneses". No longer. Now, it is referred to as "affluenza".
Secondly, encourage your child to get a job.
While this allows your student to develop an understanding of money and build a savings account, having a job will actually work against them when applying for a credit card on their own. Credit card issuers would much rather have the student's credit card usage tied to the parents account rather than to their own personal one.
Not to worry. Many card issuers will allow your student to build a credit history with parents as a cosigner. And with that parental oversight, the chances of the student going "overboard" tend to be much slimmer.
This also allows you to keep closer tabs on the child's spending and in most cases, head off any problems before they become unmanageable.
Credit cards with parental authorization also offer some sort of peace of mind. Should the student need access to emergency funds, the card is available.
And lastly, begin the learning with a debit card
If the student is still in high school and learning how credit works, opening a checking account with a debit card avoids the cost of cash withdrawals. With a credit card, cash withdrawals are often very high and the interest is applied immediately. A debit card will allow you to transfer the amount of cash the student needs and teach them to budget that money without penalties. Be sure to set limits on the balance available and don't go over you commitment. Remember, this is a teaching tool.
With so many cards in the hands of so many students, the average credit debt among college-aged students has climbed to over $3,000. There are ways to avoid this bad habit and the possibility of personal bankruptcy at such a youthful age.
Debit cards, if they are lost are stolen, do not provide the same protections that a credit card will. Have your student apply for a secured card at a bank or credit union that you do business with. A secured card is tied to a savings account with the credit limit essentially being the balance in the account.
Use the card wisely, paying off the balance on time and in full and the bank may, upon your request, free the card from secured to unsecured.
The single most important thing you can do for your student is developing a good financial communication. Tell them about the importance of keeping low balances, paying on time, and using the card only for emergencies. Tell them that although card issuers will try to lure them with flashy cards, these cards do not offer the best deals in terms of fees and even rewards for prudent use.
As with all cards, there are certain things you should be looking for and with students, these become doubly important.
For instance, a student¹s card should carry the following features:
Identity theft solutions.
Automatic bill payments.
Lost and stolen card reporting.
Emergency cash replacement.
Emergency card replacement.
No liability for unauthorized purchases.
Fraud and security protection services.
Year-end financial statement (upon request).
Up to $1,000,000 in travel accident insurance.
Auto rental insurance.
Various travel and emergency assistance services.
Medical referral services.
Legal referral services.
Lost luggage assistance.
Discounts on auto rentals.
Surprisingly, one of the best cards comes from CitiBank in association with MTV. While most charge roughly 18% on balances and about 22% on cash withdrawals, this card offers a special kind of rewards program geared directly to their target audience.
The card offers a good introductory rate (0.00% for 6 months and is applied to purchases, balance transfers, cash advances), no annual fee, average daily balance information, and reward points tied to many of the activities that students engage in such as earning 5 points per dollar for purchases made at restaurants, bookstores, record stores, movie theaters, and video rentals.
Additional points are earned when payments are paid on time and spending is not over the credit limit (25 points) with the added bonus of up to 2,000 points twice a year depending on the cardholder's GPA (beginning at 2.5).
While this might not be a selling point for parents, those points can be redeemed for such goodies as gift cards, merchandise, travel, VIP passes to MTV's Spring Break, and even tickets to the MTV Video Music Awards.
There are some basic ground rules you should insist your student follow:
1. Never apply for a card without your knowledge.
2. Never have more than one card.
3. Use the card carefully limiting its use to emergencies or purchases that you both agree on in advance.
4. Use the card as you would a checking account. Keep tabs on any usage by either tracking your balance online which parents can do as well or by simply writing it down.
5. Keep the balance as low as possible and pay it off as soon as possible. If you cannot pay the balance off, pay at least twice the minimum payment.
6. Avoid department store cards.
Ironically, these are good rules for parents as well. Teach your children well and you might pick-up a few good habits in the process.
Here is the link to AnnualCreditReport.com or you can call 877-532-8778.
