How To Help Your Young Adult Build Credit Smartly And Avoid Debt Traps
Forbes Advisor
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A Note From Patricia:
Hello and welcome to Forbes Advisor’s Weekly Brief, where each week we dive into the realities of consumer finance and empower you with knowledge to help make your financial journey easier.
Between work, chores and shuttling to and from practices, parents may not have the time (or energy) to teach their kids the ABCs of money management. Unfortunately, schools may not be picking up the slack: Less than a quarter of high school students are guaranteed to receive a personal finance education, according to a study by Next Gen Personal Finance. If you don’t have the (money) talk with your child, he or she may not get one.
It’s especially important to teach fledgling college students how to spot potential pitfalls, such as buying expensive items on layaway, managing a tight budget and carrying a credit card balance.
From our partner: If you’ve ever fallen into a debt trap or are currently struggling to pay off one or more types of unsecured debt, there are ways to get it under control. One option is working with a debt consolidation company like Accredited Debt Relief, which can help you tackle your debt and provide potential solutions to pay it down. Learn more here.
In this week’s brief, we’ll discuss how to openly converse with your children about debt traps and how to avoid them.
Sincerely,
Patricia Louis
Editor, Forbes Advisor
How To Help Your Young Adult Build Credit Smartly And Avoid Debt Traps
As a New Jerseyan, I was lucky enough to attend a high school where financial literacy classes were mandatory. (This is only the case in 25 states.)
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Even with that education, though, I still felt lost when it came time to manage my own bank account, student loans and credit cards—and so did many of my friends.
It would have been nice had my folks filled in the gap! (Not that I would have listened.)
Still, parents should take an active role in the financial education of their children. Here are a few things you can do:
Discussing what cards to get and how best to use them: There are many credit cards to choose from, but determining if your kid is ready for a credit card and choosing the right one, is crucial to their success. While there are many credit cards that are targeted to students, consider one with no annual fee and encourage your kid to pay off their card in full every month to avoid carrying a balance and accruing interest. Most student credit cards come with low credit limits which means it can be easy to max out your limit and hurt your kid’s credit scores. Advise your kids to only spend about 30% of their credit limit.
Setting spending limits: Consider giving your kid a reasonable allowance, if you can fit it into your budget (for younger kids, even $5 a week is fine). Set the boundaries: What happens if they spend their whole allowance and there’s a week before they get the next installment? Young adults can accidentally overdraft their bank accounts, so consider a monthly spending cap based on their income and needs. You can also set up automatic alerts on their bank accounts to notify them when their balance is below a certain threshold or when the card is used for a big purchase.
Understand the impact of incurring debt: In college, I had friends who would take out loans to buy new outfits for our sorority formals, which occurred about four times a year. Yes, payment plans like Buy Now, Pay Later are alluring, but as with all loans, they can leave you in the red and affect your credit scores if not paid off in time. This lesson extends to bigger fare, such as student loans. Warn them to borrow less than what they think they’ll earn in a year once they’re out in the workforce. Moreover, understand the differences between federal and private student debt.
Get your kid to monitor their budget regularly: Build a routine of sitting down with your child to review their bank statements regularly. This is a great way to understand spending habits, catch anything out of the ordinary, and keep their finances on track for success. At college, many of my friends regularly made impulsive purchases, such as Doordashing a single cup of coffee to their door for $10. At that price, coffee really can make or break a college kid’s budget.
If you’re ready to help your child start their financial journey, read more helpful tips on navigating the process here.
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