Spendthrift Kids Can Dig Deep Debt Hole with Credit Cards

Bernie Sanders is onto something. One of the strong headwinds handicapping U.S. economic growth is student debt. A gale it may be, but student debt is laudable debt, unlike the credit card variety.

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Layering credit card debt on top of student debt will put your child in a deep hole.

The next course your child takes should be one that you teach: how to use credit cards with care. Make sure you add Curtis E. Arnold’s book, How You Can Profit from Credit Cards, to the syllabus.

Modern life requires credit. Try booking a hotel room or renting a car without it. Mundane uses are fine. It’s using a credit card to make impulsive, high-end purchases that can pile up debt. Your son doesn’t need a pricey Italian suit for his first interview, or your daughter a Louis Vuitton handbag.

“By limiting your use of credit cards at a young age, you will not have to worry about carrying a heavy debt load or about making unnecessary interest payments in the years ahead,” says Dwight A. Clark, senior retirement financial planner at TIAA.

Arnold argues that credit card companies work hard to hook students like your undergraduate. How hard? They’ll dangle a bonus to get your child to sign up a buddy.

Arnold states plainly that credit card companies are profit-driven. He asserts:

*Credit card companies benefit if you make maximum charges and minimum payments; they hope you won’t fully pay balance each month.

*Credit cards are great if you know how to use them, but they will murder you if you don’t.

You can help your child by:

  • Coaching them on maintaining a monthly budget and sticking to it, Clark says. They must avoid incidental purchases that tiptoe onto the card and break the budget.
  • Making sure they understand the importance of their credit rating: that the lower it is, the more they pay in interest, and that a 700 FICO score is the threshold between average and good credit.
  • Urging them to seek a lower rate, especially if they have good credit.

Since companies change rates periodically and without much notice, Arnold says, watch what the company is charging by always checking the statement.

  • Insisting that your children carry one card in their wallet or purse and use it sparingly.

“Keeping your use of credit cards to a minimum has multiple benefits. It will be easier for you to stay debt-free and put more of those hard-earned dollars into a retirement savings account,” Clark says.

  • Insisting they make payments early.

Credit card companies base interest rates on average daily balance, Arnold says. If your child pays early, the balance is reduced, which cuts the total interest payments.

  • Insisting they avoid cash advances.

The interest rates can be stratospheric, often annualized at more than 200 percent interest.

  • Insisting they reject extra services such as credit insurance and card monitoring programs.

Never stop giving advice. As your children get older and move out, they’ll acquire more cards. Tell them to keep cards separate. Use a card for little purchases, Internet purchases, travel, and emergencies such as repairing an auto or replacing home appliances.