Given the economic upheaval of the past four years, it’s no wonder teens are cynical about the traditional financial services.
Just as they started to become aware of how money works, they witnessed the housing market collapse. Many saw their parents lose jobs through no fault of their own in the recession that followed.
But there’s a fine line between healthy skepticism of financial institutions and dangerous disengagement — and teens have crossed it, says Michael Staten, director of the University of Arizona’s Take Charge America Institute for Consumer Financial Education and Research.
A recent survey by the institute found most teens don’t trust banks, credit unions, credit card companies, businesses and investment institutions. So rather than starting their financial adulthood by signing up for a checking or savings account, opening credit accounts or investing in traditional banking products, they are turning to check-cashing services, payday loans and prepaid cards.
“They’re just as willing to go to Walmart as Wells Fargo for their banking services,” Staten says.
A growing distrust
The Arizona study, which polled nearly 900 high school students in 18 high schools in 11 states, shows how deep the distrust goes:
- The majority of students (60 percent) believe that credit card companies often entice people into taking on more debt that they can handle.
- More than 70 percent of students believe that businesses often try to “trick young people” into spending more than they should.
- Fewer than one in five students who responded to the survey (17 percent) disagreed with the statement that “banks are mostly interested in getting my money through hidden fees.”
Banks should be worried about this, Staten says, because today’s teens have more alternatives for storing and accessing their money than any previous generation. Online and mobile payments have made it possible for teens to skip the whole experience of brick-and-mortar banks.
“(Banks) no longer have a lock on becoming the primary financial institution for every one of these young adults,” Staten says.
Yet perhaps teens should be worried, too. Although they may find that alternative financial products are attractive because of their convenience and upfront disclosures of costs, they come with high interest rates and fees. They also may not have the federal protections traditional bank products offer.
Also, those who turn away from traditional loans will be less likely to borrow for life-changing investments down the road such as a college education or financing a home.
“We worry about this cynicism taking root,” Staten says.
Skepticism changing financial landscape
Distrust for the financial system has already been cited as a driver in the huge growth of prepaid cards. Between 2009 and 2012, the number of active prepaid cards jumped from 3.4 million to more than 7 million, according to numbers cited by the Consumer Financial Protection Bureau.
That means banks have their work cut out for them to win over young customers. A June 2012 report from Javelin Strategy and Research found that more than one-third of those in the 18-to-24 age bracket were underbanked. According to Experian, the swelling ranks of the underbanked leaves about 64 million consumers with limited or no credit history — that’s 64 million who might have trouble getting loans for vehicles, homes and businesses.
As the skepticism spreads to the next generation of consumers, it could even thin the pool of graduates who choose traditional financial careers, Staten says.
“It’s a competitive marketplace… and I think financial institutions have a black eye right now,” Staten says. “That black eye keeps deepening with each passing month in the headlines.”
Skeptical and naive?
The study also found that young people’s skepticism is paired with significant gaps in financial education and knowledge. For instance, 68 percent did not know that owning stocks is riskier than owning government bonds; 79 percent did not know that banks and credit unions typically have lower fees than check-cashing stores for the same services; and more than half didn’t know that a high credit score is better than a low score.
The good news is that students in the survey responded that they believe education is important to their futures and that financial success can come with smart financial decisions.
Yet that education may be hard to come by for high school students. Parents who are still struggling through the recession may be reluctant to talk about financial strategies. Also, financial education classes in high school may emphasize memorization of how products work rather than sharpening critical thinking skills, Staten says.
Rather than teaching teens about individual products, educators would be better off training students how to research alternatives for themselves and get a better sense of trade-offs, Staten says.
“This is one of those subjects we put emphasis on in the classroom, but unlike algebra or English, we’re not giving teachers the proper training in this. … They don’t have the confidence in what they’re doing,” Staten says.
From victims to savvy money managers
Teens also have a responsibility to educate themselves, says Michael McAuliffe, president of Family Credit Management in Chicago and a personal finance instructor in Morton College in Cicero, Ill. Being proactive will help them feel less like victims.
“Anytime you’re relying on someone else, you’re depending on their integrity and their understanding of the [financial] product,” McAuliffe says. The danger of that was evident in the lending and borrowing debacle that led to the housing crisis.
Knowing some basic points about finances can help teens make smart choices about financial products instead of remaining cynically disengaged. Here are some places to start, according to McAuliffe:
- Get a subscription to a financial magazine. Read everything you can about investments in print and online.
- Get familiar with a realistic rate of return. Without this knowledge, lenders can take advantage and offer you lower rates or unrealistic “guaranteed returns.”
- Learn about inflation: Inflation is inescapable over time, and if you’re locking into a long-term investment with a 2 percent return, and inflation is 3 percent, the buying power of your money is decreasing.
- Explore compounded interest: “Go online and start playing with some savings calculators,” McAuliffe says. Try this one at Bankrate.com to see how fast money grows if you start putting away $50 or $100 a month now.
- Understand how your age affects risk: The younger you are, the more risk you can tolerate.”If you need to make a down payment on a home in a few years, that money should not be in the [stock] market,” McAuliffe says. “But retirement money should be 100 percent in the market.”
Look at the history of investing in stocks over time: “The rate of return you’re going to get from equities over a long, extended period of time is going to be significant” — averaging close to 10 percent. Other investments may be less risky, but will have a much smaller rate of return.