Lessons in Credit for Young Adults

How Parents Can Provide a Foundation for Their Children's Financial Future

A recent survey conducted on behalf of leading credit card provider Capital One shows that a whopping 54 percent of adults in the United States taught themselves how to manage their finances. The Jump$tart Coalition for Personal Financial Literacy, a non-profit organization dedicated to educating young people about money matters, notes the average high school graduate lacks basic financial skills to balance a checkbook, let alone manage a credit card. This shortcoming sets young people up for certain failure, as they are forced to learn to handle their money through trial and error.

According to Diana Don, consumer affairs manager at Capital One, this pattern can be broken. "Resources are available to help parents teach their children the fundamental survival principles of earning, spending, saving and investing, including how to use a credit card responsibly," says Don.

"The number one reason for a teenager to have a credit card is for emergencies," adds Don. "Access to a card can provide security, and when used as a tool to instill good credit practices early, helps provide a solid foundation for your child's financial future."

Have a heart-to-heart with your teen about money, but don't go it alone. Use resources to help shape the conversation. For instance, Capital One offers the following tips for building and using credit wisely:

Take a Crash Course in Credit 101 -- Before giving your teen a credit card, lay some credit basics groundwork. Educate your teen about credit by discussing how it works. Explain the interest rate on a card and talk about the different types of cards available. Show him/her how to budget spending by tracking monthly expenses and receipts, as well as how to set aside money for the future. For a quick brush up on the basics of credit, visit www.capitalone.com/credit101.

Remember, credit is a loan - Help teens understand that a credit card is not free money -- it's a simple way to access a loan. Like any loan, paying only the minimum payment due can significantly increase the compounded interest charged. Bring this credit lesson to life by sharing the following example from Myvesta.org, a national nonprofit financial crisis center: If you make minimum monthly payments on a $5,000 credit card debt with 15% interest, it will take you 32 years to pay it off. Interest paid: $7,789.46

Pay all bills on time -- Ensuring payment reaches the creditor on time every month is a responsible habit that pays off in the long run. Encourage your teen to avoid submitting a late payment, which can result in late charges or a tarnished credit history.

Control Spending with Prepaid Cards -- Consider starting your teen out with a prepaid card such as Capital One's Visa Buxx. This money management tool enables parents to pre-pay a fixed amount of money on a card for controlled, safe shopping at more than 18 million Visa merchant locations worldwide. Because it's a prepaid card, the spending can't get out of hand. And, parents can avoid the time and hassle of getting cash to their children (for special occasions or weekly allowance) by electronically transferring money from their bank account to the Capital One Visa Buxx account.

Removing the Training Wheels -- When the time comes for a traditional credit card, sign up with a major credit card company whose services meet your teen's financial needs. Parents can co-sign for cards or have their children added to existing accounts. The benefit of sharing an account: Parents can have the bills sent to them to monitor monthly charges. However, be careful when sharing credit with your teen - any late charges and wild spending incurred by them can damage your credit report and result in financial liabilities.

Courtesy of ARA Content, www.aracontent.com, e-mail:

EDITOR'S NOTE: Sources: Jump$tart Coalition for Personal Financial Literacy, OmniTel Survey for Capital One, Myvesta.org.