Credit 101 for Teens and Young Adults
http://thedianerehmshow.org/shows/2010-07-29/credit-101-teens-and-young-adults
New credit card laws require people under twenty-one to either have a co-signer or prove they can pay their bills. Teaching young people how to manage money responsibly and build a good credit history.
Guests
Edmund Mierzwinski
Director, U.S. PIRG Consumer Program
Adam Levin
Co-founder of Credit.com and Identity Theft 911. He is a former Director of the New Jersey Division of Consumer Affairs.
Karen Blumenthal
writes the Wall Street Journal's "Getting Going" column, author of "the Wall Street Journal Guide to Starting Your Financial Life."
Comments
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Credit cards are just one way that financial institutions take advantage of young adults. Student loans are another. Case-in-point: the student loan default rate is rising, and will spike steeply when defaults are measured more accurately effective 2014.
Although more States are mandating personal finance courses in highschool, they're too few and too slow. Ravaged school budgets have little room for "FLUFF" like personal finance instruction.
Arne Duncan's proposed budget explicitly mentions financial literacy in its funding initiative for developing the "whole student".
Parents and educators should and can do more to help their young-adults to develop essential financial skills. After all, it's in the national interest that tomorrow's middle class be financially aware and self-sufficient.
Online learning is one way to scale to the enormous problem of financial illiteracy. There are excellent online courses in personal finance that can help schools and families provide financial skills training. They should be judged by
1. whether their content is unbiased (ie, if the program is offered by a financial institution, it may be soft about credit card Gotchas), and
2. if their efficacy is empirically measured (eg, with pretest and posttest).
Kathy Griffin
Financial Literacy Advocate and Educator
Loyal listener and HUGE fan of the Diane Rehm Show
240-314-7180
www.MoneyU.com
I am unable to get a credit card. I'm 30 with $0 in debt and am in the middle class with stable income. I've never applied for any credit until a few months ago after the new credit laws went into effect. I even checked my credit history and it's nonexistent. I've been denied by several credit companies for insufficient credit score. How does one get credit without being approved for credit. And how come college kids without much income at all are getting approved?
In defense of parents co-signing:
I'm now 42, when I was 18, credit card companies required a co-signer with a credit history prior to issuing a card.
My parents could monitor my use and advise me accordingly. After I established credit, never having had to make errors, I applied for and received my own card. 24 years later I have never required a parental bailout. After graduating from college, I move far away, purchased multiple cars and homes, and never carry a balance on any of my cards, while also having money in the bank.
The involvement of my parents at an early age help me to establish responsible credit without costly mistakes. I don't regret this and neither do my parents.
Dan, OH
Please stop refering to these adults as kids or children. Your language contributes to their coddling and disrepects them and their education to this point.
I just graduated from Middlebury College this May and had a student credit card and a part-time job for all four years. I knew the risks and the benefits of establishing my credit history early, and I knew how to use the card responsibly. I don't want to get into what that had to do with the parenting I received--thanks Mom and Dad!--but I do want to point out that I made it through college without credit card debt because I was well-educated on the importance of being responsible with my money. I think that the regulation of student cards is unfortunate but necessary, and that the next step has to be in educating young people about personal finances, whether through increased exposure provided by the private or non-profit sectors, or mandatory finance classes in high school as part of public school curriculum. 18 year olds should be educated enough not to be made victims upon high school graduation.
Our teenager gets a monthly allowance put on a pre-paid debit card offered through the teen services at our bank. She monitors the balance through an app on her phone and quickly learned that once it's spent, it's gone. The most important thing we've done as parents is not provide "rescue" funds. If the account is empty and all her friends are going to the movies, she doesn't get free money from mom and dad, but must do something around the house to earn extra funds (minimum wage is paid at our house).
We have included her and our younger kids in discussions about our family budget, hoping to educate them on forming a monthly budget and determining what you can afford prior to making the purchase. I personally feel that this is one of the most important things that we can teach our children -- how to manage their money and use credit wisely.
The problem with college kids and credit cards is that the credit card companies were PUSHING cards at the kids. They were at every function, spring break, etc.
The argument that it's a good way to teach respnosibility is ridiculous. Let them have a bank account. Let them earn money. Again, I don't have any sympathy with the "s/hedoesn't have time." People have to make choices. Maybe a kid needs to work in the summer rather than do an internship or go to soccer camp.
I graduated from college this spring and got my first credit card recently. I consider myself good at managing my money, but I am terrified to use my new card because I know the consequences that can happen from misuse. I agree with your guest when he said many young people are financially illiterate because I am an example. I think universities could help by changing general education requirements. I think they should require basic finance classes because I am completely lost when it comes to big questions regarding buying cars, repaying loans, and even buyin a house in the future.
Here is an idea for younger children: Recently I purchased Money Savvy Pig banks for our 7 year old grandchildren; these banks are transparent and divided into 4 sections - Save...Spend...Donate...Invest....this is a visible way to watch money accumulate and teach the use of money as children grow; I found them on Amazon (I have nothing to do with this company).
Karen
Warrenton, VA
Gr8 comments except that there is a segment of young people who had their credit history ruined b4 they reached 18 by their parent's or guardians who couldn't get a telephone or a rental agreement in their name so they use their children's.
In my case, I had this happen to me. My father was responsible for my hospital bills and refused to pay, so that was a strike against me as well. Some people say take your parent to court. Well, you need money to do that. Obviously, no one is mentioning this. I have worked hard to get out of the debt hole that my parents/family have created for me. Who protects children who can't even read but their credit history is ruined?
i tried to get a credit card about 8 months after getting out of the army in 1970 and was refused because my work record was too short. I guess serving inn the army doesn't count as work.
I remember shopping at sears one weekend and looking at a table saw. The salesman stopped by and asked if I was interested, I told him I was but I didn't have enough cash and didn't have a credit card.
He told me no problem, fill out this form and take it up to the customer service desk. The service desk approved me in about 15 minutes and I was able to take the saw home with me.
After using that card for about six months I applied for and got a Master Charge because I now had a credit history. This approach might well still work for someone just starting out.
Speaking of financial literacy, I believe that we need a paradigm shift in the vocabulary that we use to describe debt. Why is it we use the words "credit score" and "credit card" when they are more accurately described as "debt score" or "debt card". Perhaps if we starting calling it what it actually is people would be more cautious to use these things. Loans and "credit" cards can be useful tools, but I am always appalled at how many people there are that ring up their cards for normal everyday expenses and pay interest on those things months, even years, later.
Listening to your show now. I am 42 and incurred 40K worth of credit card debt early in life and only recently paid it off after having to cash out some retirement monies and being hit with huge penalty and taxes. I was able to get my first retail card while I was still in highschool. If you don't realize early on how credit can effect so many areas of your life, it can take another lifetime to dig out. It is absolutely necessary to start financial education in HIGHSCHOOL, especially if kids are not getting any direction from their parents. College is too late to just start learning how to manage money and build a financial future for yourself.
Yet another problem we have today that is the fault of Ronald Reagan and Republicans.
Secret History of the Credit Card
Frontline and The New York Times join forces to investigate an industry few Americans fully understand.
http://www.pbs.org/wgbh/pages/frontline/shows/credit/
"Some experts say the profitability of credit cards really began twenty-five years ago, when the banking industry successfully eliminated a critical restriction: the limit on the interest rate a lender can charge a borrower."
Watch the segment interviewing Andrew Kahr.
Great Show today. This is a very useful discussion for younger adults. I wish there were more young adults listening to learn from it. I agree with one of the callers who said that cash is best. What everyone needs to be aware is that a credit score is designed with the merchant in mind. In other words, a good creditor is one who pays interest in a timely fashion, not someone who is necessarily "responsible" with their money. This is why your credit score will go down when you pay off your debts rather than get better like one would think. I think we would all agree that we would want our children to never go into debt in the first place which is what we call "responsible".
A credit score just means that you are a good risk for lenders (aka they can make money off of you).
Funny, savings and investment accounts don't care what your credit score is.
I have read these Wall Street books and they are not helpful.
I read the Total Money Makeover, by Dave Ramsey, at Daveramsey.com. I have learned more from him than all the books and Wall Street Journal articles I have read.
College students should NOT use credit cards! VISA debit and cash is a better way to go. Budget! Spend less than you make. Pay cash for your car.
You need to learn to make your money work for you and not work for someone elses money.
Unfortunately these guests have "bought" into the "Debt is Great" dogma of corporate America. This only lines their pockets and not yours.
"But I can't buy a car without credit". Wrong! You and your parents can buy an inexpensive car.
"But I can't buy a house without credit". Wrong! If you have 10 to 20 % down you can get a mortgage through Churchill Mortgage without a credit score.
Many of the financial "truths" help corporations and NOT you get wealthy.
Read The Total Money Makeover it will change your life and your family tree.
Jon
Read my post. All you need is a VISA debit card and cash. VISA can be used almost anywhere and cash in the places you can't.
You need to have an emergency fund of at least $1000. That way you can use your fund instead of a credit card. Pay off your debt, if you have any. Then get 3 to 6 months of cash saved and then invest 15% of your income.
This is a simple formula for financial freedom.
Companies target college students so they can leach money off these kids for many years to come. Watch "The Card Game" on pbs Frontline. It will open your eyes to corporate America.
@Mark Graff,
You are blaming POTUS Reagan and Republicans for your credit card debt and poor credit rating? It must be a congenital condition that liberals are incapable for accepting responsibility for their own actions.
@Wasatch Wisdom
"A credit score just means that you are a good risk for lenders (aka they can make money off of you). "
Wrong. A FICO score over 720 indicates to lenders that you are more likely to pay back their money. The higher the score, the better the interest rate (aka: the less money they make off you).
"Funny, savings and investment accounts don't care what your credit score is."
Why would an entity care about your credit worthiness when they are taking your money, not lending you money? Hello
"College students should NOT use credit cards! VISA debit and cash is a better way to go. Budget! Spend less than you make. Pay cash for your car. But I can't buy a car without credit". Wrong! You and your parents can buy an inexpensive car."
Unless you are a fair mechanic, the used high mileage vehicle you can expect to purchase for little money is going to cost you more money than financing a new vehicle.
"But I can't buy a house without credit". Wrong! If you have 10 to 20 % down you can get a mortgage through Churchill Mortgage without a credit score."
Well, where did you get the $20,000+ for the down payment for this first home? If you have this amount of cash handy, how is it you do not have any credit?
"Unfortunately these guests have "bought" into the "Debt is Great" dogma of corporate America. This only lines their pockets and not yours."
This is an absurd statement. If you pay off your credit cards in full each month, you do not have any debt, you have not paid any interest, and you have a great credit score.
Credit Cards are "Traps in the Fine Print"
I agree everyone needs to watch http://www.pbs.org/wgbh/pages/frontline/shows/credit/view/
Credit Cards entire purpose is to earn money from consumers (you and me).
What caring parent would deliberately push their kids to own personal "traps". If you lose a job, are late on a payment or any payment to any creditor, credit cards can double or triple your rate. The new law tempers this a little.
To Cicero
I am sorry that your comments are so bitter and sarcastic.
If you borrow money and you pay it back over time most people will pay interest, either high or low.
Over 80 million Americans do NOT pay their balances in full. Most college students leave college with credit card debt; They didn't pay their balances in full.
How can you pay $10,000 -$20,000 for a down payment on a home? It is a little known secret. Save for it!
The purpose of this show was to teach students to use credit cards responsibly. Most students are not very good at budgeting. If you run out of cash or your debit card is denied there are no late fees or other fees. However, if you run up credit card debt or are late on a payment, credit cards will make you pay.
I agree with you that using credit cards like debit cards (paying the total balance monthly) has some benefits, but most college students don't pay off the total amount.
If you spend less than you make and actually save, you are empowered to pay 10,000 towards a house or buy a car.
Oh and by the way, new cars can lose up to 40% of their value in the first 4 years. I bought my car used and have driven it for 12 years. Still gets over 30 miles per gallon. No car payment. It's kind of nice.
To Cicero
If you don't borrow money your credit score will be zero!
If you don't borrow money and you spend less than you earn you will be able to save!
If you save $300 dollars a month for 10 months you can pay cash for a car. Continue to save that amount for another 10 months, since you will not have a car payment. Sell the car and buy a $6000 dollar car. Repeat. After 2 1/2 years you will have a paid for $10000 dollar car. Most people take out a 5 year loan on a car. You'll have yours paid for while most students continue to pay for another 2 1/2 years.
Saturday Night Live has a great skit on this. Basically if you don't have the money for something don't buy it. That's what Americans, especially congress, need to learn.
@Wasatch Wisdom,
"I am sorry that your comments are so bitter and sarcastic."
You invite sarcasm with your crusade against establishing credit and using it to your advantage. Not everyone is a whack job credit criminal type that calls into Suze Orman for permission to make a purchase.
"If you borrow money and you pay it back over time most people will pay interest, either high or low."
And you can command more favorable interest rates the better your credit history. Not everything you buy with a loan depreciates. If you put gas and groceries on a credit card and do not pay it off when the bill arrives then you will have elected to enrich the creditor.
"Over 80 million Americans do NOT pay their balances in full. Most college students leave college with credit card debt; They didn't pay their balances in full."
Credit card debt? Many have student loans they have no intention of ever making good. Perhaps they should have saved for their four year college tuition before matriculating?
@Wasatch Wisdom
"How can you pay $10,000 -$20,000 for a down payment on a home? It is a little known secret. Save for it!"
So what works for a home works for a college education. But While you are saving this money you can also establish a good credit history. That way when you buy your home, you can put less money down, get a better interest rate, and use the extra money you would have put down in an investment that would better work for you.
"The purpose of this show was to teach students to use credit cards responsibly. Most students are not very good at budgeting. If you run out of cash or your debit card is denied there are no late fees or other fees. However, if you run up credit card debt or are late on a payment, credit cards will make you pay."
And teaching students about how they can make their credit history work to their advantage is perhaps one of the most useful things they could learn in college. Who says you can't use a debit card and have a credit card and mange both responsibly? Students who learn how to build and maintain a high credit rating will be far better off in the world than those who are taught to shun establishing credit because they are just too irresponsible and the banks are just to crafty for them to do business with.
@Wasatch Wisdom
"I agree with you that using credit cards like debit cards (paying the total balance monthly) has some benefits, but most college students don't pay off the total amount."
Most college students over indulge in alcohol. It's a bitch when you get old enough to have to rely on your own discretion. This DR Show was about the new credit card laws that require people under twenty-one to either have a co-signer or prove they can pay their bills. This law appears to address your concerns, no?
"If you spend less than you make and actually save, you are empowered to pay 10,000 towards a house or buy a car."
That sounds reasonable....until your car breaks down and requires a $1000 to fix and you need the vehicle to get to your place of employment. What are you goining to do if there is no public transportation, and you do not have the funds in cash, but do have the ability to charge it on your credit card? Stick by your principles and hitch hike to work until you earn the $1000?
"Oh and by the way, new cars can lose up to 40% of their value in the first 4 years. I bought my car used and have driven it for 12 years. Still gets over 30 miles per gallon. No car payment. It's kind of nice."
What did you pay for this vehicle, how old was it when you bought it, what make is it, and what have you paid in maintenance over the 12 years and what is it worth now?
The depreciation is only a concern if you do not hold on to your new car for 5+ years and put on 100,000+ miles. After 5 years, you would also own this car. But since you are the original owner, and have the 100,000 mile warranty, you will have some peace of mind as well. Not to mention you have established a great credit history if you have not missed your payments. This will come in handy when you want to now purchase a new car and not have to stick with a 12+ year-old vehicle.
Unfortunately, many young adults do not learn the importance of being fiscally responsible or building a good credit history until some life event effects them in a negative way - whether one is denied for an apartment, credit card, auto loan or any other credit product. Yet, keep in mind, being denied for something you want can be discouraging, and it's important that young adults understand that denial of credit doesn't necessarily mean that they have bad credit, but it may be the result of having no credit.
We recently conducted a survey on the campus of DePaul University that showed a majority of young adults understood how important it was to have a good credit history, but when asked, "do you know how to build good credit?", the overwhelmingly majority answered, "no." This does need to change.
It's not about instilling fear of what could happen if they don't pay their bills on time, but rather teaching young adults about the opportunities they could have access to by building a good credit history, such as, homeownership, borrowing money to start a business, investing and other life milestones that they may want to achieve.
Also, it's important to learn that one doesn't have to go into debt to build credit. Having regular payment obligations of rent, utilities and other recurring bills verified and reported to be included in the FICO Expansion Score can help consumers gain access faster to traditional credit products like car loans or home loans from reputable lenders.
Evan Silverman
Co-Founder & CEO
www.williampaid.com
Teaching our kids about the dangers of debt is vital for the economy to go forward. We've seen how our generation abused mortgages and credit cards which eventually led to the credit crisis. The new law is just the first step to being a more financially responsible nation. I only hope that we learn fast enough. With so many people choosing bankruptcy and refusing to at least settle their debts (if paying them off is impossible), lenders will keep dragging the economy down. I don't know how businesses will continue to emerge if funds for start-ups aren't available.
Credit cards are the root of all evil. Many people think this idea of get now, pay later is some sort of god send, especially to young adults. But what you don't realize at that age is how easily you can be taken advantage of. For instance, my credit issuer a year or so ago started moving my payment due date forward every other month, until I defaulted... by six hours! Though they didn't report it, my APR jumped to 29.99!! It almost doubled and making my minimum payments became really hard! Well guess what! I defaulted again, because a payment I thought I had set up didn't go through! And they didn't believe me, so my credit score took a real hit. After that, I vowed to work toward credit repair and have since rebuilt my credit to nearly 700. That's still far from desirable, but what can you do!? We'll all victims to this credit game and we pretty much have to play by their rules! Unless of course you master your finances and pay for everything in cash, which ain't easy!