Why Teens Get In Trouble With Credit Cards

More people between the ages of 20 to 24 years declare bankruptcy than graduate from college, a fact that has a lot to do with credit card debt.

In a society in which even middle schoolers have access to credit cards, very few young people understand how the cards work. Almost half of all high school students failed an annual test in money management given by the government-sponsored Jump$tart Coalition for Financial Literacy, and fewer than 10 percent understand basic credit card concepts such as how banks calculate interest rates and what an APR [annual percentage rate] is.

Lured Into Debt
American teenagers spend more than $175 billion a year, or an average of $103 a week. Eleven percent have their own credit cards, and another 10 percent have access to their parents’ plastic. Once young people enter college, however, the credit cycle really begins.

Students often receive dozens of applications in the mail that read like the one from VISA that reads “You’re free from parental rule at last! Now all you need is money.” Colleges and universities actively participate in making sure their students have credit cards. According to U.S. News and World Report, banks pay school more than $1 billion every year for access to students’ names and addresses.

Over half of all college students acquire their first credit card as freshmen, and by graduation 83 percent have a card. More than 80 percent incur some credit card debt before they graduate, with 45 percent owing more than $3,000 by the end of their senior year. This debt, coupled with student loans, can push a young person into bankruptcy.

Fooled Into Overspending
By not understanding how credit cards work, young people are fooled by the concept of “minimum payment” – lured, for example, by the belief that they can spend $1,000 at the cost of just $20 a month. Yet the fail to realize that $1,000 takes six years to pay off in minimum payments of $20 a month at 12 percent interest. The average back-to-school expenditure runs about $3,400, which takes 39.5 years to pay off in minimum payments at 18 percent interest, and which incurs an additional $9,100 in interest alone.

Most teens who get into trouble with credit cards simply over-use them for routine spending, but a few roads lead more quickly to financial ruin. One way is using credit cards to pay for a drug habit. Another is to get involved in online gambling. Finally, teen “shopaholics” are at special risk. “Retail therapy” can become an addictive behavioral pattern that quickly gets them into big financial trouble.

Escaping the Credit Trap
Financial literacy used to be taught in high school home economic classes, where students learned how to save, invest and budget. This is no longer the case. Jump$tart Coalition research found that 71 percent of teens learn about money management from their parents, although only 26 percent of parents feel prepared to teach it.

If you do not want your children to graduate from college owing tens of thousands of dollars in student loans and credit card debt, you have to teach them how to handle money. Experts say it is best to start young teens out with a checkbook instead of a credit card, and to teach them how to subtract every purchase from the bank balance. Another idea is to provide your child with a prepaid credit card. You set it up by putting down a set amount of money – for example, $1,000. Every time your child uses the card, the purchase is subtracted from the $1,000 without incurring interest charges. The best cards decline any expenditure over the amount you have in place.

Anthony, Jason and Karl Cluck. Debt-Free by 30. New York: Plume Books, 2001, pg. 70-88.

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Weiss, Ann. Easy Credit. Brookfield, CT: 21st Century books, 2000, pg. 51-78.