While Congress has passed many measures in the last ten years aimed at reducing the opportunities for predatory credit card companies, the reality is that first-year college students and young adults ages 18-21 are still able to qualify for some cards that offer limits much higher than their incomes can realistically sustain. To be able to recognize and thus avoid the mistake of accepting too much credit, it can be beneficial for young adults to get an education in these financial matters before leaving the nest. Yet, for parents who already spend a lot of time and worry planning their own budgets, it can be difficult to find the time to prepare and teach lessons for their kids about credit card management.
Here are some sobering statistics that might spur parents on to take action regarding their children’s financial education:
According to the U.S. Federal as of December 2011, the average U.S. household carried just less than $16,000 of credit card debt.
According to the Federal Reserve Board, only approximately 30 percent of all American households pay their monthly credit card charges in full each month.
According to the Financial Industry Regulatory Authority, 36 percent of credit card holders do not know the interest rate of the credit card they use most frequently.
You Can Remind Them
Our kids can have short memories. They often are quickly on to the next latest and greatest thing. But when you have “loaned” them the money to pay for yesterday’s fascination and tomorrow brings yet another “must have,” standing firm can be one of the best teaching tools a parent has.
This may mean reminding your child that they have not paid back the loan for the first item. Yes, there may be some disappointment. However, the extra work it might require to teach a child about expectations of living within one’s means, not necessarily their desires, could one day help prevent more destructive behaviors like borrowing too heavily or spending too much on non-essentials.
Play a Credit Game
One kind of learning tool that potentially can be useful for children and young adults is simulators and games designed with the intent to teach good habits.
The nationwide student news network, Channel One News website (no affiliation) offers an interactive credit card simulator program at no charge on its Life section landing pages. Children can select a credit card that they want to apply for and go through a similar process they would as an adult applying for credit.
The simulated credit card offers typically have varying limits and interest rates. As children begin to play, they have the option of making simulated purchases and payments. Each time they make a choice, a “statement” is available detailing how this impacted the status of their credit card.
These statements can be printed out for display on the refrigerator door at on a family activity center. By playing once a day or every other day or once a week, children may continue to print their new statements detailing their status and more importantly, providing them with a visual depiction of how their actions are affecting their simulated finances.
It is a good idea to keep this game light-hearted. However, to drive home the point of choosing not to pay their bill, one option could be leaving one neglected statement in view longer just to demonstrated that bills don’t go away simply because they are not paid.
Bring In a Coach
Parents sometimes wait for hours in line to sign their kids up for sports where they are coached by another adult or take their children to weekly music lessons to learn how to play piano, trumpet or guitar from a specialist. Why not take the same approach with finance and enlist the help of a financial coach to teach your kids about money and credit card debt management?
A growing number of financial planners such as Brett S. Ellen, the founder and president of the American Financial Network (no affiliation), are branching out beyond helping their adult clients plan for retirement by holding specialized seminars for children and teens.
In these workshops, the kid’s financial coaches explain complicated financial terms and concepts in language children understand. They also relate financial expenses through scenarios teens can understand. For instance, a financial planner explains that paying a credit card late fee of $30 can require four to five hours working the type of minimum wage jobs many teens may be familiar with, such as working a fast food drive-thru line or bagging groceries.
As many parents painfully know, children – especially teens – sometimes are more apt to hear and heed life advice from someone other than their parents. To learn more about this new trend, go to the CreditCards.com (no affiliation) website and search for the article, “Does your kid need a financial coach?”
Compute Compound Interest
While many historians have come to refute the idea that Albert Einstein dubbed compound interest to be one of the most powerful forces in the universe, computations of credit card interest charges at financial institutions across the United States and worldwide daily prove that if the famous scientist had said it, he wouldn’t have been far off base.
It is a complicated concept that may make an enormous difference in financial matters. It can work in your favor if you are the one collecting the interest and it can work drastically against you if you are the one paying. So, how can a parent potentially communicate this concept to kids of all ages?
One possible way is to open a home-based Bank of Mom and Dad. Have your child deposit one penny per day. You, as the parent, deposit a penny every other day without telling your child. At the end of the week, have your child open the bank to count how many pennies it contains. There should be eleven pennies, not seven. The visual of the extra pennies can help demonstrate the concept in a manner that children understand. To drive the point home for older kids – especially teens – you might want to use quarters.
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