Teach Teens How Credit Works

For teenagers, getting a driver’s license is a rite of passage that comes with freedom and bragging rights. The same goes for credit cards.

One of out of three high school seniors uses credit cards, and half of them have cards in their own names, according to a 2006 survey by the Washington, D.C.-based Jumpstart Coalition.

Brian Jones, author of “Getting Started: The Financial Guide for a Younger Generation,” said parents should try to get those teens into the habit of using credit cards wisely.

“Recognize that credit is a privilege, not necessarily a right, for parents and teens,” Jones said.

There’s some danger in the fact that plastic is just how things are done nowadays. Jones pointed out that 18 to 24 months ago, fast-food restaurants did not take credit cards, and now it’s hard to find one that does not accept them.

“With credit cards, we need to define what’s an acceptable purchase. Pizza at 2 a.m. may not be justified, but books for a class may be,” Jones said.

Jones said discussing finances shouldn’t be a taboo subject for parents.

“This is like keeping their kids off drugs. They have to talk to their kids. You have to lead by example,” Jones said.

For parents, leading by example doesn’t mean all talk.

Jones said, for instance, if a teen wants an expensive toy, parents should teach the teens to save their money they make from chores or other jobs. When they have the money, the teens can use a credit card. When the bill comes due, the entire balance needs to be paid off.

“I think it’s a great way to learn a lesson to postpone gratification,” Jones said. “Teaching them it’s OK to want material things, but you have to pay for it.”

Building A History

Lucy Duni, director of consumer education of TransUnion’s TrueCredit.com, said that long, healthy credit history is good for a credit score, so it is important to establish credit at an early age.

“The key is to understand the meaning of credit and how it can help in the future and to manage it carefully over time,” Duni said.

She suggested two ways for teens to do that: by “piggybacking” as an authorized user of a parent's card; or getting a secured card, which is backed by a bank account.

Duni said the typical age to start seems to be between 16 and 18 years old, but some credit card solicitations target teenagers as young as 13.

Experts recommend keeping the card’s limit low -- $500 or less.

Skills For Life

Learning about credit cards isn’t just about paying the bill on time or even paying the entire balance at once.

“We need to be teaching these kids life skills,” said Mary Beth Pinto, director of the Center for Credit and Consumer Research at Pennsylvania State University. Young people need to know what a credit report is and how it follows a person throughout life.

Pinto said that while schools, peers, the media and parents try to teach how things work, there are holes.

“What about giving them the skills to learn about managing their finances?” Pinto asked.

She recalled an instance in which a college student did not know what a canceled check was. Pinto said money management should be introduced as early as preschooler, with learning tools such as toy ATMs.

She said developed a game for ninth- and 10th-graders and college-age students called the Driver’s Training Manual for Credit Cards. It walks participants through using a credit card in different scenarios.

The center’s staff members go to classrooms to work with children about financial topics.

“The whole idea is to get them aware. (We) talk about comparative pricing. These are life skills that these kids need to know,” Pinto said.

“The consequence is an understanding of what the minimum payment is and what it does. If they understand, then they have to change (their) behavior,” Pinto said.

Pinto said when they go to high schools students use calculators to show how many years it will take to pay item off when the cardholder only pays the minimum payment.

Pinto said the organization also has online games to show teens the consequences of using credit cards.

Accountable For Accounts

Pinto said that it’s not just about holding people accountable, but that kids need to see that there are consequences if they don’t control credit.

She said different studies show how often parents can help teens get a credit card, and then they help bail their teens out from debt incurred.

Pinto said that kids who get bailed out keep on spending, and parents don’t hold them accountable.

"Just doing it on credit, it’s not free money," she said.