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Are You Being Squeezed Dry by your Child’s Credit Card Debt?

Never too early to teach kids to live within their means

By Fred Yager
ConsumerAffairs.com

July 24, 2008

• More about credit cards ...

Did you ever wonder why it was so easy for your college-age child to get a credit card, even though they have no source of income? Well, in the eyes of some credit card companies, they do have a ready source of income — and guess, what, it's you.

And here you thought that tuition, housing and books were going to be the biggest financial burdens in footing the bill for your children’s college education. You probably never even considered that monthly statement from your child’s credit card company — or companies — that can be for hundreds, even thousands, of dollars.

Now that you've got your son or daughter home for the summer, maybe it's time to stop the madness and begin teaching them how to sensibly use and manage their credit card purchases (paying off, or even avoiding, debt in the first place) before it’s too late.

What we mean by “too late” is that once they’ve graduated and are on their own, not knowing how to manage their credit will haunt them their entire lives in the form of low credit scores (not to mention requiring a disproportionate amount of their entry-level salary possibly leading to a mountain of debt that may take years to climb out of, if they ever do).

According to the Student Monitor market research survey, over 40% of all college students have at least one credit card. Of those with at least one credit card, nearly two-thirds pay the entire bill every month. Or, at least, someone does. In many situations, it is their parent who is paying the bill. The survey also found that the average balance for those who don’t pay off the total amount is $452.

It can be a “catch 22” because if the parents are paying their bills, the student is considered an excellent credit risk. That leads to the credit card company increasing how their credit limit so they can borrow more and more which often leads to spending “to the limit” and so the debt grows as well as the debt repayment burden on their parents.

A non-partisan public policy group called Demos claims the average credit card debt among college students increased by 11 percent between 1989 and 2004 with one in five students experiencing what they called “debt hardship.”

Congress ponders

There are a number of bills before Congress aimed at making it harder for unemployed college students to qualify for credit cards.

Most of the legislation is targeting companies that have booths right on campuses luring in students with free T-shirts, baseball caps, or coupons for everything from food to entertainment. All the student has to do is fill out a credit card application.

One bill, sponsored by Missouri Democrats Rep. Emanuel Cleaver and Sen. Claire McCaskill, would require that students who are unemployed or who lacked written parental approval be at least 21 before they could qualify for a credit card.

It’s highly unlikely that more laws will do much to solve the problem, which has its roots deep in the current culture, one where an entire nation has been living far beyond its means for years. As a nation of consumers, our collective credit card debt is approaching $1 trillion — with a "t." If students see their parents using credit cards, and incurring credit card debts, which often require taking out a second or third mortgage on their house, what kind of example is being set?

That credit score

The Consumer Federation of America says that by just taking a few simple steps, we can all reduce overall credit card debt by billions of dollars a year. All we have to do is raise our credit rating scores by about 30 points. Here are some ways to do just that:

• Always pay your credit card bill on time

• Don’t max out or approach maxing out your card’s credit limit

• Pay off the entire amount that is owed instead of transferring balances to lower interest or 0% alternative cards

• Keep the number of cards to a minimum (some recommend just one card, for emergencies only)

• And check credit reports regularly to make sure there are no errors that could be lowering your score and if there are correct them as soon as possible.

Your credit score basically shows how well or poorly you handle credit. It doesn’t account for your income or your age. It can, however, have a major impact on how much you pay for the privilege of borrowing money, or whether you can even get credit.

Really bad scores could influence whether you can even get health and life insurance, telephone service, rent a car, or even a job. That’s right. Many firms look at a job applicant’s credit scores prior to hiring as another consideration in whether the person is someone they want to employ.

Teach your children well

So what can we do to help our children? The head of a Chicago-based financial education company, Money Savvy Generation, recommends teaching the concept of waiting until you can afford it before you buy anything. This sounds like finance guru Suzy Orman’s approach. In fact she preaches it nightly on CNBC.

For parents, that means learning how to say “no” when their children ask for something that falls beyond their budget.

This begins to instill in them the ability to financially plan for how to pay for something they want. As they go through this process, you’ll be surprised how often they come to the conclusion that they didn’t want whatever it was all that much. And if they do, they’ll figure out a way to pay for it.

Many financial experts agree that too many children have grown up with a sense of entitlement because their parents bought them whatever they wanted. They never developed the concept that if you want something, you have to work or save for it. It’s there, they have a magic card, they’ll just buy it and figure their parents who’ve always paid in the past will just keep on paying.

And, in fact, many parents do continue to pay throughout the college years without thinking about how much harm this is going to create down the road when that child is completely grown, a college graduate, and on their own.

Financial planning experts say one way to help your children is to teach them how to create a monthly or weekly budget and stick to it. That means figuring out how much money you’re bringing in (income) (or your child is contributing through allowance, part-time or full-time jobs) compared to how much is going out in expenses.

Teach by example: If your income is greater than expenses, begin to build up at least three months worth of living expenses to cover emergencies such as unemployment or medical emergencies. Showing your child that you are not spending “to the limit” is a powerful and positive lesson for them.

Finally, consider discussing the benefits of a debit card, associated with a checking account, for your college-age student. It offers the convenience of being able to pay for food and textbooks with a card, rather than cash, but it is tied to the actual money that is in your child’s checking account, rather than using a credit card which means that payment is actually being deferred.

Yes, you will still have to discuss the importance of budgeting and limiting spending with your college offspring, but it will avoid getting into the habit of amassing large credit card debts.

You may want to tie your child’s debit card to an overdraft account to take care of any cash-flow problems that occur. This is of course another situation that teens have to learn to deal with but as a parent, you will have more control over your child’s spending patterns since the bank will send a notice if an overdraft was necessary. Yes, there may be a fee for an overdraft, of $10 or more dollars, but at least you can have a dialogue with your teen about keeping more careful control over spending rather than finding out, much to your surprise and shock, that the monthly credit card bill has grown to $2,000 or more ... again.

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