Money Management

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

May 2008

Pennsylvania Institute of Certified Public Accountants (PICPA) advises that the teen years are a great time to introduce children to the rules for managing credit and debt.

Don’t miss out on 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. Some estimates say 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 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 such as cars or appliances. However, remind your kids that this privilege 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 he or she doesn’t pay off a balance immediately, anything bought will cost more than the sticker price because of interest charges.

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 with cash.

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 Web site, www.360financialliteracy.org, contains articles on topics such as teaching teens about money, investments, and how to manage their summer earnings.                       

Founded in 1897, the Pennsylvania Institute of Certified Public Accountants is a professional association of more than 19,000 CPA practitioners in public accounting, industry, government and education. PICPA is the second oldest state CPA organization in the United States. Use PICPA's CPA Locator to find a CPA in your area.