There’s a growing trend across the country of young people getting into credit and debt troubles very early in life. Part of the blame is easy credit. But equally culpable is a lack of credit education. Kids aren’t getting that from the usual sources that we expect. But failing to teach your kids about credit will set them up for credit failure. And that’s why you need to step in and provide that education.
They Won’t Learn About Credit in School
With all that kids learn in elementary school and high school, you might be surprised to know that most are not taught anything about personal finance. That includes credit. In fact, only five states – Alabama, Missouri, Tennessee, Utah and Virginia – require students to take a semester of personal finance in high school.
That leaves 45 states with no similar requirement.
And college? Though it may be offered as an elective course, personal finance is almost never required in any course curriculum.
That’s a scary thought. Personal finance is one of the most important “survival skills” that a child can learn to prepare them for life in the modern world. It’s not just credit that we’re talking about here, but also basic banking, investing, insurance, and budgeting.
But the absence of critical exposure to credit could be the most damaging missing piece. After all, most people don’t become aware of the dangers of credit until they are already in a difficult situation. At least some exposure to the darker side of credit could potentially avoid this fate for millions of people.
But it won’t come from schools.
Kids are Very Unlikely to Learn About Credit on Their Own
Most kids these days spend an inordinate amount of time on the Internet. Whether it’s done on a laptop or a smartphone, they’re constantly “connected”. This is not unlike the kids who grow up in the 1960s, 70s and 80s, glued to a TV set.
Mostly they’re chatting with friends, playing computer games, shopping, monitoring the social media, or just web surfing. But missing in all of those activities is learning anything about credit. What’s ironic is that there’s plenty of educational information about credit on the web; it just holds little appeal for teens and twentysomethings.
Though we might assume that some critical education – or at least awareness – about important subjects is coming out all of that Internet activity, that’s usually not the case. For most young people, the Internet is primarily a playground. The only time serious material is sought on the web is when it’s required for school work.
And we already know that in most states, those requirements never include credit education.
You’re the Last Line of Instruction When it Comes to Credit
If your children are ever to learn anything about credit early in life, they will have to learn about it from you. You will have to be purposeful about this. And of course, that means moving beyond the concept of credit as a tool that enables you to acquire the trappings of modern life. This also demands a deep conversation about spending and budgeting as well.
Thorough discussions of the darker side of credit are required of course. This should include lessons about using credit conservatively, avoiding debt except where it’s absolutely necessary, and making sure that monthly payments don’t consume a disproportionate percentage of available income.
One of the most critical lessons: just because a bank approves your loan doesn’t mean you can afford it!
They must come to understand that there is an intrinsic business purpose behind credit. The lender is never doing you a favor! They are extending you a loan because they fully expect to make a profit in the process. That gives banks an incentive to make loans, even if the borrower is only marginally qualified.
The Consequences of Never Learning About Credit
A child or young adult who never learns about credit is potentially being set up for credit failure. We can’t afford to assume that they’ll learn what they need to know as they go along in life! And unfortunately, it’s much easier to get into debt than it is to get out of it.
This is evidenced by the rising number of young adults who are already buried deep in student loan debt before they enter the job market. The Wall Street Journal reported this past spring that 40% of student loans are delinquent. This is a solid indication that many students are borrowing more money than they will comfortably be able to repay in adult life.
Unfortunately, it doesn’t stop with student loan debt. Many also come out of school owing thousands of dollars in credit card debt. And once they graduate, they are also likely to need a car, as well as furniture for an apartment, and a new computer.
The combination of new spending priorities – on top of an already high level of student loan debt – puts them on the debt treadmill early in adult life. At that point, working becomes primarily an exercise in earning money to service debt.
From there, things can get a lot worse.
Moving Past the Point of No Return
In today’s competitive job market, college students often learn that starting salaries upon graduation are insufficient to service student loan debt – let alone the other credit obligations that they are likely to incur by necessity.
The arrangement can lead to credit problems very early in life. Insufficient income is only the first problem that they face coming out of the gate. Many find that debt quickly becomes a lifestyle. Each major purchase is financed with debt, and each debt comes with a monthly payment that reduces cash flow.
It’s just a question of time before they fall behind on payments, or are even forced to default on loans in order to survive. Once that starts happening, credit scores collapse, new credit is hard to come by, and when they do get it, interest rates are well into double digits.
This is a sad way to start life indeed. So another aspect of the credit education that you need to give your kids is knowing when to realize that enough is enough!
Credit problems tend to multiply to a point where you can no longer work your way out of it. At that point, some sort of structured debt reduction or elimination process will be absolutely necessary. As painful as it may be, it may be the only way to break free of the debt treadmill, and to move forward in life.
If your child, as a young adult, gets into this position, the best lesson you can teach them may be to get professional help to deal with it. Legal help is often the best kind, since it will offer them an opportunity to exit their debt troubles in the cleanest way possible. That will be the best way to help them reclaim their lives from the credit trap they are now in.
And rest assured, that when they emerge from their credit problems, they will have all of the credit education they will need for a lifetime.