Posted on November - 12 - 2009
Are You Licensed to Spend?
Provisions of the Obama administration’s CARD Act make it more difficult for adults under the age of 21 to get and use a credit card, and that’s just fine with a majority of consumers surveyed by CardRatings.com.
Roughly two-thirds of the 956 respondents to the company’s poll said they approved of limiting credit access to young adults. CardRatings founder Curtis Arnold nevertheless has doubts about the legislation.
Caption: dmuth
“I think legislators really ‘missed the boat’ on this one,” Arnold said in a press release. “We allow our sons and daughters to go off to Iraq and Afghanistan and fight at the age of 18, yet starting in February millions of students likely won’t be able to get a credit card until they are 21!”
Arnold’s passionate response is understandable; freedom to fail is a right Americans have enjoyed for decades. But there’s also no doubting the numbers. Twentysomethings suffer more from self-inflicted credit wounds than do their older peers.
Rising college costs could be partly to blame. According to an April study by Sallie Mae, college seniors with at least one credit card graduated with an average of $4,138 in credit card debt last year. Let’s put that number into context:
• The average U.S. worker took home $41,334.97 in gross annual pay during 2008, reports The Social Security Administration.
• According to The Federal Reserve, consumers held $899.4 billion in revolving credit as of August, or roughly $3,000 for every one of the 300 million or so Americans alive today.
Not only are college kids graduating with a higher level of indebtedness, they’re graduating with a big chunk of their annual incomes already spoken for by way of interest payments — and that’s assuming they’ve found jobs paying $40,000 or more a year.
So while Arnold’s response makes sense, so does the Obama administration’s nannying of young creditors. The statistics are too startling to ignore.
Meanwhile, parents like me are stuck between these competing forces. We’re the fortysomethings who hope to raise fiscally responsible children. What can we do to prepare them for their first credit cards? Here are three suggestions.
1. Establish a budget.
Credit cards are best used as checks, payment tools where the hoped-for result is to not carry debt but collect cash back or other rewards. We can help our children live this ideal by building a budget they’ll stick to. A simple spreadsheet or free online service should do the trick.
2. Create a BIG spending goal.
But a spreadsheet alone isn’t enough. Budgets fail when they operate in a vacuum. Our kids need goals to make their budgets actionable. What they’re saving for doesn’t matter. Be it a car, a PlayStation, or a weeklong vacation away from Mom and Dad, giving children reasons to save should increase their savings.
3. Be the banker.
And if they still don’t save? Allow them to borrow, at a rate they’d pay if they had a credit card. Let them experience the pain of watching interest and minimum payments turn a $200 PlayStation into a $500 PlayStation. Better that your child overpay for a video game console than a house. Eviction is a nasty way to learn about responsible credit.
As parents, we can and should take action early. What else would you do, and what are you doing now? Please use the comments section below to weigh in on these questions and tell us whether you favor the Obama administration’s credit activism.
Tim Beyers is a professional freelance writer who has been a regular contributor to The Motley Fool since 2003. He is also the co-creator of Editorchat and curator of The Freelance Writer’s Helper. Visit his Website or find him on Twitter, @MileHighFool.
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