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Money Management (Distributed by the New Jersey Society of Certified Public Accountants)


                                              Don’t Let Your Teen Get Caught in a Credit Crunch

When is it best to teach your children about using credit and borrowing money wisely? The New Jersey Society of Certified Public Accountants (NJSCPA) advises that the teen years are a great time to introduce children to the rules for managing debt.

Don’t miss the opportunity to broach this important topic. Young adults are swamped with advertisements for credit cards as soon as they enter college, and many don’t know how to say “no.” It’s estimated that undergraduates are carrying an average outstanding balance on their credit cards of $2,100. Between credit card debt and hefty student loan balances, young people often struggle to cover all their payments.

Explain the Good and the Bad
Let your child know that there’s nothing wrong with credit. It’s a useful tool that can make it possible for people to buy a home or finance purchases of cars, appliances — even a child’s college education. However, remind your kids that this privilege also comes with a responsibility to spend wisely and make the necessary payments when they come due.

Interest Rates and Payoff Dates
The next time you receive a credit card offer, sit down with your child and explain how it works. In particular, show him or her how to find the interest rate and any other fees associated with the card. Explain that if you don’t pay off a balance immediately, anything you buy will eventually cost you more than the sticker price because of the interest charged.

Calculate the Difference
Your next step is to show them how interest works. Many online sites contain calculators that reveal the real cost of debt and how long it takes to pay off a purchase if you pay only the minimum amount due. Your teen will quickly see the cost of charging a purchase rather than paying it with a debit card or cash.

Try It Out
After you’ve explained interest rates and shown some examples of how they work, let your teen test out a credit card. One way is to get a prepaid spending card that your teen can use to spend a limited amount and no more. Next time you go clothes shopping, hand your teen one of these cards and let him or her make decisions about how to spend the preset amount. It’s a great way for your teen to learn how to budget while becoming familiar with using a credit card. Another advantage to these cards is that there’s no interest on your purchases, since they are paid for in advance.

Use the Best Resources
The 360 Degrees of Financial Literacy program — a public service effort created by the CPA profession — has a treasure trove of information on teaching your children to spend wisely. The “Childhood” section of the website, www.360financialliteracy.org, contains articles on topics such as teaching teens about money, investments and how to manage their summer earnings.

And don’t forget to consult your local CPA for any advice you need on financial issues facing your family. The teenage years are the best time to teach your children about using debt wisely, and your CPA can offer the advice you need to help them get the right start. Some helpful ideas from an expert can prevent bad spending decisions later on in life.

If you would like to receive more information on various financial matters, subscribe to E-CPA, the NJSCPA's free, monthly email newsletter. To subscribe, visit www.njscpa.org/finances or email a subscription request to e-cpa@njscpa.org.

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Money Management is a weekly column on personal finance distributed by the NJSCPA.

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