Money & Career
How you can help your children avoid debt
Money & Career
How you can help your children avoid debt
Jessie blames the $750 cellphone bill on her failure to read the fine print on her contract. "I didn't realize I'd be charged long-distance fees for calling my voice mail or I would never have checked in as often as I did," she says. (Jessie called her voice mail a whopping 160 times while she was away.)
The $2,500 on her credit card (cosigned by her parents) was the result of a spending spree on clothes and gifts that ka-chinged out of control. Jessie had set aside $500 from her part-time job; that was the limit on her credit card. She figured that when she reached that limit, the card would be declined. So she spent and signed, spent and signed, waiting to be declined. But it never happened. Unbeknownst to Jessie, the bank had raised her limit to $5,000.
The Grade 12 student from Cochrane, Ont., is now struggling to pay off her debt while also trying to save money for college in the fall. "It's almost like I need a second part-time job," she says. "It's so stressful."
The common problem of credit card debt
When it comes to racking up bills at a young age, Jessie is hardly alone. Six in 10 Canadians between the ages of 18 and 29 report they currently have some debt, with credit card debt by far the most common, according to a 2008 study by the Financial Consumer Agency of Canada (FCAC). Half say their debt load is as much or more than they can handle.
Financial experts aren't surprised. "We're constantly bombarded with the message to buy, buy, buy," says Pat Foran, consumer reporter for "CTV News" in Toronto and author of the Smart Canadian's Guide to Saving Money (Wiley, 2009). Many young people, raised on instant gratification and inadequate financial planning, are happy to do just that. Their eagerness to spend – as well as their influence over household purchases – makes them highly sought-after consumers.
The "buy now, pay later" mentality has landed many youth in financial hot water and seriously damaged their credit ratings, which can delay future plans such as getting a car or student loan, renting an apartment, starting a business, and (further down the road) starting a family and buying that first home.
"People under the age of 25 are particularly ill-equipped to think about consequences," says Stephen Perrott, a professor of psychology at Mount Saint Vincent University in Halifax. "They have a very here-and-now view of life, and can't project into the future very well." That makes them easy prey for these debt traps.
Page 1 of 4 – Find out how to avoid the credit card trap on page 2.
The credit card trap
In today's consumer market, plastic rules. As many Canadian youths have a credit card (72 per cent) as have a savings account (74 per cent), according to the FCAC. Teens younger than 18 need permission from a parent before they can start swiping, but as soon as you cosign, they're good to go.
Credit cards are at the root of the debt problem for many young people, says Foran, who has three daughters, ages 11, 13 and 22. "Kids have access to cards in their teens. They get one card with a $500 limit, then they get another offer and take out another card with a $3,000 limit. Then they use one card to pay the minimum on another and get a third card. I've seen this happen so often. It spirals out of control."
Until the age of 19, Alex Campbell of Toronto paid for everything in cash. "If I didn't have the money, I didn't buy it," he says. But when he got his first credit card, he treated it like an ATM machine. "Plastic didn't seem like real money," he says. Over four years, Alex racked up $7,500. He put off going to university until he could make a dent in his debt, but when he finally started at the University of Toronto last fall, three-quarters of his part-time earnings were still going to paying off his bills.
Avoid the trap
"There's nothing wrong with a kid having a card with a $500 limit to teach him responsibility, but he should have a part-time job and should see that credit card statement come in every month and pay it off," says Foran. "If he can't pay it off, he should at least be aware of the interest he's incurring."
That's advice Roxanne Ramedani could have used when she applied for her first credit card last year at age 17, with her parents cosigning. "I thought that as long as I made a payment, they wouldn't charge me interest on the balance," says the Toronto teen. "Then I got overwhelmed by the whole interest thing, and ended up owing $1,000." Her advice to other young people: "Do more research and make sure you understand what you're signing."
Better still, stick to cash. "We're big promoters of cash only," says Robyn Gunn, one of the authors of The Smart Cookies' Guide to Making More Dough (Random House, 2008). "If you can stick with the cash system, you get into a lot less trouble." If you cosign a credit card for your teen, keep a close eye on the account and make sure she understands that if she messes up, that puts you in credit trouble too. "If she can't use a credit card responsibly, she's not ready for one," adds Gunn.
Page 2 of 4 – Discover why cell phones and pre-paid cards can be just as harmful to your child's finances as credit cards on page 3.
The cell phone trap
For many young people, cellphones ring up debt. When the bills come in, those hundreds of minutes, thousands of texts and expensive extras, such as customized ringtones, video downloads and photo messaging, can really add up. Paul Stevens's* son, 23, and his girlfriend rang up $2,000 in cellphone debt over several months. They were surfing the Internet constantly on the cellphone, says Paul, who finally refused to foot the bill any longer. His son's response was to simply walk away from the debt, much to his father's dismay. "It's one thing to be in debt and quite another to have no intention of paying it back," he says. "You have to pay your bills – that's an essential value of mine. Now the bill collectors are after him."
Avoid the trap
Make sure everyone understands the charges for roaming, text messaging, web access, etc., and what your plan covers and what it doesn't. And try to avoid getting caught up in the cool factor. Websites such as cellphones.ca can help you compare what's on offer and select a plan based on your calling needs and budget.
"If you're going to give your tween or teen a cellphone, they should certainly help pay for it, or at least know what the bill is each month and aim to keep it down," adds Foran. "If kids think everything is unlimited, that sends the wrong message."
The pre-paid card trap
Credit card companies now market special prepaid cards to teens as young as 13. MuchMusic's Prepaid MasterCard, for example, is loaded and reloaded with a certain amount of cash up front and used like a credit card.
The appeal is that parents can monitor their teens' expenses, while still giving them a little control and flexibility over what they choose to spend the money on. "Kids can't get carried away because they have to have a cosigner and there are limits," says Mike Farrell, a founding partner of the Toronto-based youth market and research firm Youthography.
Critics, however, see these pseudo-credit cards as a way to hook kids on the real thing and make it easier for them to spend money.
Avoid the trap
If you have $100, it makes sense to put it in the bank instead of on a prepaid card, says Foran. "I'd rather see kids learn to use their debit cards responsibly." Critics also point out the additional costs associated with these cards. The MuchMusic card charges a $39.95 "membership and activation fee" for the first year and another $9.95 in year two. It's $1.50 to load more money and a $1 charge to take cash out of an ATM. If the card expires, an "inactive fee" of $2 is charged against any remaining funds.
Page 3 of 4 -- Find out whether you should bail your child out of debt on page 4.
The student-loan-as-free-money trap
"A lot of my friends treat education money [student loans, etc.] as free money," says Corey Smith, 23, who graduated from Dalhousie University in Halifax last year debt-free. "They want to use all the money on themselves, on fun things. They think they're going to get big jobs when they graduate, but the big jobs don't always come. And six months after they graduate, it's payback time." While previous generations had their own share of "OSAP parties," they didn't pay for tuition and books on credit cards as a result.
Because we're a debt-accepting society, students seem to be more debt accepting, especially in their first few years of school, says Bonnie Neuman, vice-president of student services at Dalhousie University. "Many of them are out on their own for the first time and it's their first time managing money."
Avoid the trap
Encourage your kids to treat student loans like any other kind of debt, says Gunn. "The faster they pay it down, the faster they can free up money." They should try to make extra payments toward the loan, even if it's only $100 a month. If your kids work, the most painless way to do this is to have it transferred from their paycheques. To track a student loan, visit the Human Resources and Skills Development Canada website.
Teach your kids money smarts
Odds are if you teach your children how to handle money early in life, they won't make expensive mistakes later on.
Kimberly Smith and her husband always made it clear that they weren't going to spoil their kids by paying their way. "We gave them allowances and opened savings accounts for them at a young age, talked to them about money and encouraged them to contribute to their education," says Kimberly, a primary school teacher in Dartmouth, N.S.
Her eldest son, Corey, 23, graduated last year debt-free. "Sure, there are things I would have liked to have done along the way," says Corey, "but I'll do them later when I have the money."
To bail or not to bail?
If little Johnny runs up $900 on his credit card, Mom and Dad might feel inclined to pay it off and say, "Don't do it again," out of love, says Foran. But chances are, Johnny is going to do exactly that.
Foran suggests taking the middle ground. "Help kids see the error of their ways. Help them pay back a portion of the debt and then closely monitor the situation to make sure they don't do it again."
*Name has been changed.
This story was originally titled "Youth and the Kiss of Debt" in the June 2009 issue. Subscribe to Canadian Living today and never miss an issue!
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