The #1 Credit Card Mistake Parents Make

By Eva Maria Norlyk

You would never let junior drive a car without a driver’s license. But have you ever thought about the risks involved in letting him cruise through college with one or more credit cards in his wallet?

Credit cards are a fact of student life these days. And while it’s easy to assume that kids graduate from high school with some basic financial literacy skills, this is for the most part not the case. According to the Jump$tart Coalition for Personal Financial Literacy, the average high school graduate lacks even basic financial management skills, such as keeping a balanced budget and saving for retirement. In some cases, high schoolers graduate without even knowing how to balance a check book.

The #1 credit card mistake parents make is to not realize that kids need to learn how to use credit cards in the same way as they need to learn how to drive. Come college, your kid will be courted by credit card issuers left and right, and it’s only a matter of time before she ends up with her first credit card. Credit cards are a powerful financial instrument, and student credit cards, unfortunately, often land kids in a heap of trouble. Without proper preparation, many young adults are left to muddle through on their own and easily end up with bad financial management habits.

The new credit card legislation, which steps into effect in early 2010, gives new power to parents by requiring young adults under 21 to get a co-signer (which in most cases will mean mom or dad) when they apply for a credit card. This offers some protection by making it harder for students to sign up indiscriminately for credit cards. However, the new law will only have its full effect if parents get proactive about getting involved in their child’s financial education.

According to the 2009 Consumer Financial Literacy Survey by the National Foundation for Credit Counseling, more than one third of the people surveyed said that their most important source of personal finance education was their parents. Only 9 percent of the people surveyed said they learned what they know about financial management in school.

In short, in most cases it’s up to parents to teach the financial management skills that many high school graduates are lacking. There is a lot to know about managing personal finances, particularly as the financial climate is getting increasingly complicated. Moreover, financial management isn’t just about knowledge, it’s about helping your kids adopt certain behaviors and habits which will serve them over the long run, rather than gradually undermine their financial health.

So which is the best way to teach your kids about credit cards? Take the bull by its horn. Get your kids a credit card early, while they are still living at home (and you’re the one paying the bills). Use the credit card as an opportunity to show how easy it is to overcharge and spend more than one intended with credit cards. Help your kids understand the pitfalls of paying only the minimum monthly payment. Teach them good habits of credit card usage by requiring them to pay off the balance in full each month. Show them how to keep track of charges, so they don’t get shocked when they get their statement at the end of the month. You can even use the credit card as a platform to teach basic money management skills, including the importance of keeping a good credit rating and paying bills on time.

Once your kids get to college, the pressure will be on mom and dad to co-sign for a credit card. Unfortunately, by then you’ll have little control over how the credit card will be used. So with kids and credit cards, go by the old adage: a stitch in time saves nine.

Published: September 16, 2009