How To Educate Young People About Loans And Credit Cards

If more parents knew how to educate young people about loans and credit cards, Americans would be in a better place financially. Young people are graduating from college with not only tens of thousands of dollars in student loan debt, but also with thousands of dollars in credit card debt. Choosing not to educate young people about loans and credit cards before sending them off to college is akin to throwing someone who cannot swim into the deepest end of a pool and saying "good luck." Young people should be taught about loans and credit cards far before they are actually in the position to acquire them.

  1. Start early and start small. Although an eight-year-old may not be able to fully grasp the concepts of credit limits, interest rates and other aspects of loans and credit cards, he will be able to understand basic money management techniques. Children can be given a small weekly allowance that can be used to purchase "wants." A child will quickly learn that his allowance can be spent as soon as he gets it on candy or other small things, or it can be saved for several weeks in order to purchase the pre-owned video game he's been eyeing at the store.
  2. Turn every opportunity into a lesson. Never "give" your child money to purchase wants. When your son asks for $100 to buy a new computer part, let him know that he will have to repay the full amount, plus interest. To drive the point home, draw up a contract that both of you sign, outlining the monthly repayment amount, interest rates and any penalties for late payment. Take every opportunity you can to teach the young people in your family about loans and credit cards.
  3. Let them learn on your terms. The best way to educate young people about loans and credit cards is to give them real-world examples. The probability of your child getting a credit card while in college is high; a 2009 Sallie Mae survey revealed that 84% of undergrads have at least one credit card. While your child is still a high school student living under your roof, get a credit card with a credit line of no more than $200 and make your child an authorized user on the account. Teach her to pay the balance in full each month using the money she earns from her part-time job. If she goes over the limit, close the credit card account and let her know she is responsible for paying the balance. If you know your child isn't skilled at managing money and would likely spend over the limit on a credit card, get your child a prepaid credit card instead.


Sallie Mae

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