Teens, Credit Card Debt and the Truth

We've all seen the commercials for credit card companies: Well meaning parents give a credit card to a college student for "emergencies," and either while showing up for an impromptu visit or getting a
heart-stopping bill find out the card has been "maxed out."

While shopping, at church and eating in fast-food places I have heard children and teenagers ask, plead for and beg their parents for credit cards. "I'll only use it in an emergency!" yeah. Seldom have I heard a parent ask the interesting question: "Exactly what do you consider an 'emergency?'" The answer might come as a surprise.

A few years ago I did a survey of teens in my church, then sat down with their parents with the results. These folks were getting hit with the "I need a credit card" petition. Amazingly, the top answers were not: paying for a tow when the car breaks down, an emergency gas-tank fill up, missing the last bus and needing a taxi or anything an adult would choose. The top answers turned out to be: dinner at the mall perhaps including friends, clothes, food delivery for parties and other non-emergency items.

I wondered who these teens were. I thought I knew them, having watched them grow up from birth. Did some metamorphosis take place and turn them into different people? I thought they had sense.

Speaking with them and their parents, one theme presented itself: the perception of credit cards as opposed to reality. Small wonder. Media ads everywhere give the impression anything can be had by using plastic. And had now. No mention is made of the reality that shows up in a month: the bill. No matter, the payment is miniscule, just make that.

Using one parent's credit card bill, I pointed out the credit limit- a high figure- $1,500. Some of the teens cheered. But wait-there's more. Moving down the bill, the monthly payment was only $45 a month. Teens cheered. But wait-there's more. Continuing down the bill, I pointed out the principal (the amount actually applied to the whole balance due) being paid was a paltry $9.52 on a balance of $1,257.85. No one cheered.
Credit card companies are there to make money. Period. They are NOT going to help anyone pay the card off and get out of debt. They make the majority of their money on the interest payments (the majority of that
"minimum" payment) and on late fees. They have no incentive at all to helping anyone but themselves.

I finally had the teens attention. Up until that moment, the meeting had been treated like a joke. "I'll get a job and pay it off myself," "All I have to do is make the minimum payment, right? No problem." The question was asked: What do we do?

Until the United States Congress convinces credit card companies to raise the minimum payments to at least 10 percent of the balance and add interest to that amount, those swimming in credit card debt could drown. Instead of waiting, I offered the following advice:

Before using a credit card, look at the interest rate. For example, if a card has a 20 percent interest rate, add a zero to it. Two hundred percent is what you'll pay back by making the minimum payments only. That means for a $20 pair of jeans, not only paying back the $20, but nearly an additional $40 in interest. Or before each use of the card, sitting down on paper and using the math formula I=PRT. Interest= Principal multiplied by the Rate multiplied by Time. The formula comes very close to the same amount. No one seemed willing to pay $60 for a $20 pair of jeans.

I had credit card debt until I paid off my last card 2 years ago by taking the bill and adding a payment of 10 percent of the balance to the existing "minimum payment." I saw the balance start to drop dramatically. When I could afford more, I paid more. On the glorious day of zero balance, I cut the card into little pieces and sent it in with the last payment. I patted myself on the back, bragged to friends at work and was proud of myself.
Now that I had that monthly payment still in my budget, what to do? There are all kinds of offers for "pre-paid" credit cards. I suggest reading all the print, fine and otherwise. You give them your money,
then use the card to spend only the amount you've paid in. If you don't use the card, the amount builds up. Who gets the interest on that account? Not you. The credit card issuer gets that interest, along with any other fees for "managing" the account, processing the purchases, etc. That didn't sit well with me. The whole idea of paying off credit cards is to have more money, not give it to someone else.

I solved the problem easily by going to my credit union and opening a second checking account. This account has a debit card with a credit card logo on it. It can be used as a debit card or as a credit card. I simply make the payments to that account that I was making to a credit card company. And who gets the interest on the account? ME. I manage the account, track the purchases, everything.

The parents and teens both realized this solution is not only feasible, but easy to do. A teen can build financial responsibility by getting "that job" and depositing some or all of their money in the account. A college-bound student has the "allowance" their parents deposit. They can only spend what they have, no more. Emergency account? Save money in the savings account and both parties sit down and if necessary, write down what is a true emergency. I suggested parents may want to impose a penalty for misusing the "emergency savings."

I was asked about younger children. How do they not lose their heads in a "plastic world?" With a family of children I that I used to watch, I asked the parents if I could try an experiment in money management training after a trip to the store. I would give each child an allowance. Not cash, I gave store gift cards. Since the oldest child had more responsibility she would receive a higher allowance. The money would be loaded onto their cards, and the children would be given a 3x5 card with their balance on it. We agreed to several rules that would be followed by the children and adults, and put everything in writing, in case the children needed reminders. When everything was ironed out, the children were informed. They were elated. The oldest child was given a calculator to figure sales tax on items to help others realize if they had enough money for the entire purchase. They could not borrow from each other or adults for a purchase.
They had "plastic" almost like adults, but learned quickly that the card is not a spend-all, have-all. They could only spend what they had. Their parents did not allow the children to put their cards together
to buy one toy- avoiding the "who owns it" argument later.

While lay-away was available, they were introduced to payments, responsibility, and what happens if those payments were not made. Borrowing from the parents/other adults (only with the parents permission) meant making payments with a small (3 percent interest with consequences if payments weren't made). When Wal-Mart announced lay-away no longer available, I watched as the oldest child asked if she could have a second gift card to save money on when those "gotta-have-it-now" purchases are encountered. She was 10 years old. I was never prouder. No one had mentioned having two cards or a savings account until that day.

Now, each child has two cards, one marked "savings" and one marked "main." They also now can deposit money into their parent's savings account (Mom keeps excellent records) to have money to spend somewhere else. When these children are old enough for checking accounts they will be well-tuned to financial responsibility.

The oldest child is almost in college now (I feel old), has managed a checking account and debit card for almost a year, and is researching scholarships and student loans for college. She does now to read all the print in an application and to ask lots of questions. She's learned to look before she leaps. The rest of the children are learning from her, too.

While these methods may sound simplistic, they really do work. Perhaps the store gift cards will work in some families, in others it may not. Some use "money jars" stored in the parent's closet.

There are many different methods out there. The only true way to find out what works is to give different methods and honest try, say six months.

Whatever method or plan works for you or your family, stick with it. It takes effort.

Here's some incentive: A lot of the adults returning home to live with/off of their parents are doing so because of overwhelming financial irresponsibility. Teaching them to be responsible now will help help them in their future, and parents can have that "sewing room," "den," etc. of their own. And keep it.