NEW YORK (MainStreet) When John Ulzheimer was in college, his parents gave him a Texaco gas credit card just for gas. But instead, he swiped that card for beer, chips and sodas every time he went to the corner gas station with his friends to the tune of over $3,000 by the time summer came around.
"My parents dropped the hammer and told me that I was allowed to keep every dime of my summer earnings, as soon as I paid them back for the plastic abuse," says Ulzheimer.
So, he learned the hard lesson about how small purchases add up and about the high cost of credit before it became a serious debt. Now he is the credit expert at CreditSesame.com.
Not all kids make big money mistakes
Young adults don't get much financial respect on the assumption they are irresponsible with credit cards and money. So, The U.S. government enacted The Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009 which made it illegal to issue a credit card to anyone under the age of 21 without a job or a co-signer. This law can have protective benefits to maturing adolescent minds, especially when it comes to making long-lasting financial mistakes.
But, recent findings from researchers at the Federal Reserve Bank of Richmond and the University of Arizona counters discovered that people under age 21 are actually better at managing their credit than those in their 40s.
The study compared several age groups using bank data from before the enactment of Card Act of 2009 and after and found that those under age 21 are substantially less likely to cause a serious delinquency , such as paying a bill 90 days late, and least likely of all age groups to default on a credit card.
Is your college student the financially responsible type or not so much? Now that it's the middle of the school year, you might have become aware of some minor (or even major) mistakes your college kid has made with money.
Poor college grades may lead to poor money management
You may notice poor grades before or along with other major money mistakes.
"If students display a poor work ethic and cannot handle the basic responsibility of maintaining an agreed upon GPA during school, that behavior can easily transfer to irresponsible use of a debit card and credit card," says family finance expert Ellie Kay, author of Lean Body, Fat Wallet (Thomas Nelson, 2013).
Poor grades across the board may mean a student is not emotionally or academically ready for college or interested in attending college full-time. The colleges put students on academic probation for poor grades (in danger of being expelled and losing credits for withdrawn or failed classes), and students will likely also lose any institutional academic grants or state-based academic eligibility for funds for subsequent semesters. If poor grades are the case, insist on a specific GPA the following semester and if not met, stop spending money on the college. "I tell my kids (and I have seven) that my love is unconditional but my money is conditional," says Kay.
Common money mistakes college kids make
Most college kids make financial mistakes at one time or another, as Ulzheimer did in his youth, because that is how we all learn. Ulzheimer advises parents monitor their kid's finances and intervene as a teaching opportunity to correct financial mistakes especially if he:
- Spends all his cash and often asks for more
- Causes overdraft or other bank fees
- Charges up a credit card
- Fails to make bill payments and/or causes late fees
It may be irritating for you and costly for him to intervene now, but without a parent's intervention, financial mistakes can destroy your kid's future credit making it difficult to pay bills on time or qualify for a cell phone plan, an auto loan, an apartment lease, a job and later, a mortgage.
Here's what you need to do to teach them responsible financial behavior, before it's too late:
Suggest your kid gets a job:
Was the intention of your cash allowance to help your child concentrate on studies instead of working part-time during college?
If your kid is constantly asking for more money or if you see irresponsible purchases on a credit card that suggest he thinks there will always be an unlimited amount of money, Kay says you need give him an education on the value of a dollar and what it takes to earn it.
Simply reduce your financial input and suggest that your son or daughter find a job for spending money. And if he's lost grant funding for poor grades, suggest that he make it up by heading to the college's financial aid office to apply for work-study funds (an on-campus job, where earnings go directly to the school to help pay costs of attendance).
Reduce student loan amounts:
Even worse, if your student is using student loan funds for more than books and paying the school for the costs of college attendance (student loan funds are dispersed directly to the student), you need to explain the costs of student loans to your student, says Ulzheimer.
Is your son or daughter aware that every dollar borrowed costs twice as much to pay back and that it generally takes ten or more years to pay back student loans?
If leftover loan funds are being spent frivolously, have your student contact the financial aid office at the college and reduce the dollar amount of loans he takes for subsequent semesters to reduce overall student debt at graduation, says Ulzheimer.
Pay back overspending on your credit cards and fees
Another important finding of the Federal Reserve Bank study is those exposed to credit cards earlier are less likely to default and more likely to have a mortgage earlier than those who experience credit cards later.
"Credit is part of your child's future financial life," says Ulzheimer. "Teach them about credit and help them establish their own credit while you can still monitor their use by adding them as an authorized user to your account. Don't simply cosign for their own card because then your student has the power to use the card whenever, wherever but you bear all the liability if they choose not to pay."
Keep credit card spending from turning into unwanted or unaffordable debt by calling the bank to request a lower credit limit on their card to start, at $500 or less, advises Ulzheimer.
"If your young adult ignores your spending limit instructions, they should return the card to you and be held accountable and responsible for paying back charges and fees," Ulzheimer advises. For those that have over-charged, you can try offering a prepaid debit card for books and emergencies.
Don't give up; try again
When teens make money mistakes with the checking account, debit card, credit card or by spending their entire paycheck, they will learn important lessons from natural consequences such as bank overdraft and transaction fees, late fees, how interest increases balances or simply not having any money when they want it or worse, when they need it.
If your student exhibits better financial responsibility in a few months (along with better grades or a more responsible attitude toward money), Ulzheimer suggests trying again with the credit card instructions. "You definitely want to teach them how to use financial products properly and responsibly before they are on their own," he said.
--Written by Naomi Mannino for MainStreet