Teaching teens about debt
The recent recession brought North America's shaky relationship with debt into the spotlight, with reports of crippling zero-down mortgages, rising bankruptcies and record low savings rates. Unfortunately, the problem isn't just an adult one -- a growing number of teens are drowning in debt.
The cause? Cell phones, electronics and clothes top the list of teen must-haves, but it's the underlying problem that has personal finance experts and debt counsellors worried. While affluenza-stricken teens are highly susceptible to glitzy ad campaigns telling them to buy, buy, buy, they simply don't understand how to manage costs such as cell phone contracts and credit cards.
Like their parents, many teens don't have a clue about money.
Risks of poor credit
While it's easy to spend money at the mall or rack up hundreds of dollars on a cell phone, it can be almost impossible to pay it back -- especially for teens who work part-time hours at low-paying jobs. But a history of late or unpaid bills when you're 18 can have far-reaching impacts well into your 20s.
If you haven't managed your credit well as a teen, you now have poor credit scores to take with you which will limit your ability to purchase a house or a major asset," says Kim Deep, founder of KidzMakeCents.com, a financial literacy program for teens. "I don't think teens think of these consequences because they're living in the moment."
What's worse, low credit scores are a problem that will only get worse if poor spending and savings habits go unchecked.
"If teens don't understand how to manage and learn the basics at a young age, how are they going to be able to handle more complex issues such as buying a house or leasing versus buying a car?" asks Laurie Campbell, executive director of Toronto-based nonprofit counselling agency Credit Canada. "We see the results of this all the time in here. It could set you up for a lifetime of financial failure."
Teaching teens to use credit responsibly
While teens can't apply for credit cards until they're 18, some parents choose to co-sign for a card or authorize their teen to use their own cards, arguing this teaches good financial responsibility. Not necessarily, say the experts.
"There's a reason that kids don't get credit cards until the age of 18, because obviously they're not mature enough to handle them," says Campbell. "Unless you have a good, solid, paying job, unless you're using this credit to build up your credit rating and unless it's used for convenience, emergency and planned purchases, you really shouldn't be using credit in the first place."
Debit cards are one great way to learn about managing money as teens can keep track of their expenses and fees, she says. Another is to have teens live on cash alone, with no access to debit or credit cards, so they're forced to keep on top of their cash flow.
But some parents like the security and convenience offered by a credit card. If your teen must have a card (remembering that you'll be on the hook for any debt your teen incurs), it's up to parents to help them use it responsibly.
"If parents still choose to give their kid a card, they need to ensure that whatever limit is on that card is affordable for the teen to pay off," says Tamara Kelly, education coordinator of Credit Counselling Services of Atlantic Canada in Saint John, NB. Having a low limit reinforces that credit isn't free money and that debt needs to be repaid. "That's the only way they're going to learn responsibility."
To bail out or not?
If your teen is already drowning in debt, you may be tempted to bail him or her out. But while it may seem like the right thing to do, the experts agree there is a better way.
"If you just bail them out, you're going to be back there, and the bill may be higher next time. You're not doing them any favours later on when they have to manage their own credit cards," says Deep.
That doesn't mean leaving your teens to drown. If you do decide to pay their bills, help your teens figure out a repayment schedule -- to you -- that works within their budget, and make sure they stick to it until the debt is repaid in full.
"When a person works their way through the debt, they're less likely to have the same financial issues in the future," says Kelly.
But more importantly, sit down with your teen and figure out what created the problem in the first place.
"One of the things that is really important for teens is, it's never too late. We can always change our patterns -- it just takes a little bit more work," says Deep. "They still have time on their side."
And teens are keen to learn. According to a recent survey by Credit Canada and Capital One Canada, 97 per cent of teens are interested in learning about money management, yet only 13 per cent indicate they know a lot about the subject. It's no surprise given that only 14 per cent of parents indicate that they have provided an in-depth explanation to their teens about the importance of saving money, different saving vehicles and the benefits of each.
So, parents, it's time to step up to the plate. Talk to your teen abut the basics -- things like how compound interest rates work, what credit scores mean and why it's important to pay on time -- and the bigger picture importance of saving, giving and budgeting.
Set limits for what you will and won't pay for (such as voice mail or unlimited texting, but not both), as that helps teach teens the value of money.
And above all, encourage open communication. "Talk about your mortgage, your debts, the cost of living -- you should really be talking in financial terms when it comes to anything that's going to cost you or your family money," says Campbell. "A lot of parents think they're doing their children a favour by sheltering them from this information, or maybe they're embarrassed or they don't know how to talk to their children about money management. To me, it's critical they do."
Fiona Wagner is a freelance writer in Hastings County, Ont.