"Talk to your teens about money"

How to have a conversation with your children about debt, credit cards and budgeting in college. 

By: Judge John C. Ninfo II

Did you know that your children’s credit scores may be more important to their future than their academic transcripts? Or that 68 percent of high school and college students say they have never had a meaningful conversation with their parents about personal finances?

What’s your reaction to an Indiana University administrator candidly admitting that they lose more students to credit cards than to academic failure? Or a Rochester Institute of Technology professor estimating that as many as 10 percent of college students will drop out of college because of credit problems?

The problem
On a recent flight to the West Coast, I sat next to a woman on her way to see her son to discuss his finances. She was still unsure whether she and her husband should bail him out of his credit card debt and put him on a repayment plan, or let him “learn the hard way” by dropping out of college to get his finances under control and then finish his education.

Believe me, this is a conversation that you don’t want to have with your child.

Most college students are easy prey for the creative credit card offers and free gifts that they will be bombarded with from the moment they walk onto campus.

The problem is that too many young people are financially illiterate. They are hungry consumers getting their first tastes of financial independence and can think of a million reasons to do and buy things they can’t afford. Young people are too quick to be influenced by the peer pressure of other students who are using credit cards and taking advantage of these offers.

Greg was a 19-year-old sophomore at a prestigious university. In a little more than a year, he had lost more than $7,500 playing online poker.

A class president and the son of a minister, he became so desperate over his gambling debts, financed with credit cards, that he robbed a bank.

Greg was one of approximately 1.6 million college students who gambled online last year. Will your child accept a credit card solicitation when they go to college so that they can gamble online?

Unfortunately, it is the naive use of easy-to-obtain credit cards and its impact on their credit reports that has resulted in so many college graduates being turned down for jobs, car loans, apartments, graduate student loans—and even being forced to file for bankruptcy.

In a world where all of this is happening, it’s time to get serious about making sure your future college student learns some of the basic lessons, tactics and techniques of personal finance.

Start with the basics
Don’t assume that your teen’s school has taught her anything about personal finance. Open a checking and savings account with her now, and make sure the bank has a branch near her college.

Teach her to put a portion of her income (part-time jobs, allowance or gifts) into the savings account for an emergency fund (say $500), and to save for some of the things she may want for herself (an iPod or tickets to a concert).

Too many Americans have forgotten about the need for savings and the value of delayed gratification. Teach your child both of these lessons and why they are important.

Teach her to fill out the check register when she writes a check, and show her how to balance the account. Discuss the difference between needs, wants and wishes.

Get your teen a debit card
The debit card should be tied to the checking account. When used, your teen should make an entry on a check register.

Consider whether you want the debit card to have overdraft protection. It may be just an easy way for your teen to
overspend once he figures out how overdraft protection works.

Using their checking and savings accounts and debit cards responsibly will teach your children how to manage and
budget their money.

Help your teen create a realistic budget before they go to college
Now that you have taught your child some of the basics of managing money, it’s time to get serious about budgeting
for college.

There will be many new things to spend money on at college, and your teen might be tempted to take advantage of all
of them. She might even be tempted to try to “keep up” with some new, wealthier friends.

Visit the CARE Program Web site, careprogram.us, for an article on how to build a college budget together. Discuss
ways to save money, and keep working with your teen to update her budget and monitor her own spending throughout
college.

Explain to your children the dangers of credit cards, and discourage them from having one until they are college
seniors.

Your teen doesn’t know that credit cards are not new money, more money or free money. In fact, unlike reasonable
student loans, home mortgages, cars or business debt, credit card debt at high interest rates and exorbitant fees is bad
debt and the most expensive debt they can incur.

Explain to your child that if she uses a credit card and makes only low or minimum payments, she may end up paying
two or three times as much for the items she charged. It will take her years to pay for the items because of the interest
and fees added on.

The credit card industry makes billions of dollars in profit every year because people buy into our competitive
consumption society that believes debt is OK.

Encourage your child to resist all of those offers for credit cards and to not contribute to a credit card company’s
profits. Explain the consequences of credit card abuse. Help your child understand that the best way to manage debt is
to avoid it—and the best way to avoid debt in college is to avoid credit cards.

Get your student a credit card in her senior year of college to improve her credit score The responsible use of a credit card will definitely help your teen’s credit score for a future home or car loan. So help your student get one credit card with a low credit limit and a reasonable interest rate senior year of college. Explain to her that she should charge a few things that she can afford, and pay the balance off every month on time. However, for a few months, she should charge a small item and not pay the balance in full, but make the minimum payment on time, paying the balance with interest at the end of the following month and making sure she doesn’t charge anything more during that month. This will provide her with a favorable credit history for when she wants to get a home or car loan.

Improve your teen’s financial IQ
Visit the CARE Program site as a family. You can learn important tips on personal finance, check out links to other sites and read past CARE Program articles from The Next Step Magazine.

Hon. John C. Ninfo is a Chief U.S. Bankruptcy Court Judge. He founded the Credit Abuse Resistance Education
(CARE) Program, online at careprogram.us.