Before young people charge straight into a lifetime of debt, parents have plenty of chances to talk to them about how to use credit wisely. NY1's Money Matters reporter Tara Lynn Wagner filed this latest installment in her ongoing series, "Teach Your Children How To Manage Money."
Muriel "Mickie" Siebert knows a thing or two about managing money. The first woman to own a seat on the New York Stock Exchange, she went on to develop the Siebert Personal Finance Program, a financial education program for teens, after meeting a number of people who were deeply in debt before they were in their 20s.
Siebert says part of the problem is credit cards.
"They don't know what interest is and the penalties you pay when you don't pay in a timely manner," she says.
Legislation now bars young people from getting a credit card unless they can prove they have an income or can get an adult to co-sign the account. The million-dollar question is, should grown-ups do that?
"I do believe it's an important tool for a teenager to have and a young adult to have, to learn how to use correctly," says Donna Rosato, a senior writer for Money Magazine. "For example, you need to show them that if they charge something, they need to be able to pay it off or they are going to owe more."
However, Paul Golden, a spokesman for the National Endowment for Financial Education, says there are other tools available to help teach the concept of credit without the same consequences, like a pre-paid or secured credit card.
"What you are doing is setting a preset limit that they can not exceed," Golden says. "You can start with a really small amount, get them to introduce the concept of plastic, and when it’s gone, it’s gone and that is going to be pretty useful."
Another option is a debit card, preferably one linked to the child's own account so that, according to Carmen Wong Ulrich, the president of ALTA Wealth Management, "They really feel it when the money is spent."
Do not wait until a child is a teen to teach about credit. If a sixth grader wants an item that's a bit beyond his or her allowance, the child can get a loan and may even get charged a little interest. The child just shouldn't be let off the hook.
"Because that's the way that they are going to learn, that when you borrow something you have to pay for it back," says Linda Descano, the president and CEO of Citi’s Women & Co.
Finally, when it comes to credit, parents should not just talk the talk.
"If you are saying 'Here are the limits,' but they hear you complaining about a credit card bill because you spent too much on something, actually that will be more of a lesson to them than everything," Ulrich says. "You're basically saying it's OK, it's OK to go over, it's OK to spend too much."
Parents should use their example as a cautionary tale, showing their children how they are working to correct mistakes and keep from making the same ones.