Lessons in Credit: Children of the Great Recession

Still, your children need to learn how to budget. They should have something in place that gives them access to money while in college. And managing a financial account is an important life skill that they probably won’t learn in school or from anyone except you.

Editorial Comment: We generally think of aging as a process, where eventually the kids manage the end of life situation and know what to do because they are all grown up. But what happens if the kids have no money, need your money to survive and are so poorly educated that they can’t get a job that pays a living wage?
Readers here know I believe the wealth taken by Wall Street should be returned to the homeowners and investors from whom it was stolen. It’s the only practical way out of this financial crisis that continues to worsen even as media reports say otherwise. But all this didn’t happen in vacuum. Take a look at the world we are headed for and the hand we as a society have dealt our children and grandchildren. Pick up a copy of the Atlantic this month and start reading at page 42.  Get a sneak preview of our society in 5, 10 and 20 years from now.
There are lots of lessons from the Great Wall Street Theft of the last decade, some good and some bad. I hope that the children of this experience come away with some common sense and basic values that have been diminishing for the last 3 or 4 decades.
Reading some of the latest pieces by Thomas Friedman, who has been harping on the elephant in the living room, I can only hope that people out there are listening. Basic values are obvious and shared by everyone. we know what is right and wrong. We permit others to do wrong when we get scared or lazy or both. Wall Street wasn’t really to blame for this debacle, it was us. It didn’t take a rocket scientist to see median income declining, unemployment rising and men dropping out of the workforce before the 2008 crash.
It didn’t take a genius to see that “financial services” becoming 40% of our total economic “output” meant that we were trading with ourselves and calling it profit and commerce. So now while we were sleeping Wall Street,founded on greed, intended to be channeled toward the betterment of mankind, has  taken all the money, multiplied it in a mist of non-existent wealth, siphoned off the economic backbone of our country and maybe the world, and we are stuck with the outcome. Or are we?
Good people are coming alive, rejecting the old ideologies and politics and separated us and coming together with the knowledge that virtually all of us find our government is not serving us or any good long-term aims. My children understand wealth and credit and they are using their knowledge in practice better than I ever did. Credit Cards are just another “packaged” good that we use out of a perception of convenience and lack of discipline. Buying an item on sale with a credit card that you can’t pay in full when the bill comes in is the same as buying the item for twice the retail price or more.
And as for those credit cards remember they were securitized too, so the people you are paying are not your creditor. Whether your creditor is actually getting the money is unknown. Similarly whether the credit card has been paid off by third party payments from government bailouts, insurance, credit default swaps and co-obligors is also on the table. I’ve made some efforts with car loans and leases, credit cards and other bills to see if the real creditor can be found without much success. I’m no bigger fan of paying credit card bills than mortgage payments that were rigged to enslave the great bulk o our population. We’re not just upside down on our homes. We are also upside down on just about everything we did or bought on credit.
I hope the children of this recession get something positive out of this long period of unemployment, underemployment and pure frustration, anger and social chaos that will follow. We have miles to go before we meet again in prosperity. My hope and prayer is that parents teach their children real values and send them out into a world that needs good people doing good things.
Maybe the first thing we can do is to actually do what we say we want to do because we actually believe our government has been co-opted by businesses whose goals are neither national nor concerned with common welfare. Maybe like the polls suggest we want to do, we just just adopt the motto in November “When in Doubt, Throw Them Out.” It’s true we might get a bunch more people who get bought off by business. But if we keep doing it every two years they will get the message.
February 13, 2010
Your Money

Credit Card Limits for Youth Can Be Opportunity for Parents

If you’re having trouble figuring out how to raise financially responsible children, you’ll be thrilled with this news: Congress is stepping in to help you set some limits.

This month, large parts of the credit card bill that President Obama signed into law in 2009 go into effect. Among them are rules governing credit card use by anyone under 21 years old.

Starting Feb. 22, they can’t get a credit card unless they have an independent source of funds to pay the bills. Failing that, they’ll need a parent to co-sign the application (and submit written permission before the credit limit can rise).

The temptation is to stand up and cheer. Banks will no longer find it useful to plant themselves at tables outside the student union, luring innocent freshmen with offers of free sandwich coupons or T-shirts in exchange for completed credit card applications.

Still, your children need to learn how to budget. They should have something in place that gives them access to money while in college. And managing a financial account is an important life skill that they probably won’t learn in school or from anyone except you.

So if not their own credit card, then what? There are at least three basic options to choose from, depending on whether you’re most concerned with your child establishing a credit history or are simply determined to keep anything out of their hands that could get them on a plane to Las Vegas.

Different college students have different needs at different times. That means you may end up testing all of these methods before too long.

DEBIT ONLY Many parents see only risk in credit cards — and not the potential upside of establishing a credit history at age 18.

So they teach their children how to set up a checking account with a debit card that draws on it (or insist they use cash and only cash). No credit. These students start college knowing they’re only supposed to spend what they have in the account. If they blow it and overdraw, then they should be on the hook for the fees. That’s how they learn (and quickly).

For parents whose children deposit money that they earn themselves to pay daily expenses at school, then the parental oversight may end with setting up the account. It’s sink or swim after that.

Other parents, however, transfer an allowance into a joint checking account each month. That way, they can keep an eye on their child’s spending using online banking.

Celia Brugge, principal of Dogwood Financial Planning in Memphis, took the no-credit approach with her two sons, both of whom are in college. “The best approach depends so much on the responsibility level of your kids,” she said. “Mine are what you would call free spirits.”

Her son Martin, 22, a student at the University of Memphis, isn’t crazy about that description. But he agreed with the approach his parents took, even though he’s slipped up and overdrawn his account a couple of times.

“It’s still better than spending yourself deep into debt on a credit card with a really high interest rate,” he said. “It’s not like having free money sitting around, which is sort of how it seems that people think about credit cards. It’s this little piece of plastic that lets them get whatever they want, and they don’t really consider the consequences.”

One consequence of not having a card is that your child is not building a credit history that can make it easier to get a better credit card or mortgage rate later. But Ms. Brugge said she just did not see the urgency.

CREDIT NOW Other parents start their children on credit as early as possible. Kathy Stepp, a financial planner in Overland Park, Kan., got her daughter a credit card at age 16. Ms. Stepp co-signed for the account, which is the approach the credit card bill endorses.

“Delaying the process is something that I really don’t understand,” she said. “You’re going to hide the information from kids? If you don’t talk to them about sex, do you think that they’ll never have sex? Or are you going to teach them about credit and have them use it right?”

So Ms. Stepp looked over her daughter Sammi’s shoulder as she paid the bill in full each month. She had Sammi keep a Post-it note in her checkbook and jot down what she charged. And Ms. Stepp helped her switch to a card with better online access at age 18.

The only problem with this approach is that parents are jointly liable for any debts, and their credit gets dinged along with their child’s if they don’t pay the bill on time. And you may not be able to kick your rogue child off a co-signed account. A Bank of America spokeswoman said both co-signers need to agree in writing before one is removed.

A solution is to pay the bill yourself and have your child write you a check each month. After a year of on-time payments, you can turn over payment duties (and perhaps encourage your child to have the card issuer pull the minimum payment from a bank account automatically each month, so there’s never a late fee).

THE HYBRID APPROACH There’s another way, however, that combines the best of both worlds. Craig Evans Carnick, a financial planner in Colorado Springs, suggests a five-part approach in the “College for Financial Knowledge” program he leads for clients’ children.

First, he suggests making your children authorized users on your credit card. This allows them to have their own card and build a credit history, too. Because the account is not technically their own, any impact on their future credit score will result from how well the parents manage their accounts.

Second, explain that the card is for emergencies only, say a tow truck on a snowy night. Pizza cravings do not constitute emergencies. American Express has a nifty feature that allows you to cap the spending on authorized user cards. It offers this option only on charge cards like the Green and Gold cards that you generally have to pay off each month.

Third, have your children develop a budget. If they haven’t started college yet, have them ask older friends for estimates.

Fourth, open a checking account that parents can have access to.

And finally, have a plan for what happens if your child runs out of money. Establish some ground rules; perhaps any bailout comes in the form of a loan or out of the allowance from a future month or semester.

These should be enough options for most families. But if you’re a student under the age of 21 and your parents have terrible credit or are out of the picture for whatever reason, the new law may keep you from getting a credit card at all come Feb. 22.

John Ulzheimer, president of consumer education for credit.com, which matches people with the right credit products, worried that the law could put those students at a disadvantage. The length of your credit history is a factor in your credit score. So if you’re barred from having a card until age 21, it may make borrowing money to buy a car more expensive at age 23. Or it could make it impossible altogether. Sammi Stepp said a friend was unable to lease a car or borrow to buy one on her own because her well-meaning parents had her on the cash-only plan.

That said, students under 21 with jobs could end up qualifying for certain credit cards because the job should count as a source of funds. If you take out student loans, meanwhile, your credit history may begin as early as 18.

And for those with no jobs and no loan, there are still a few days until the law takes effect. What do you want to bet that card company representatives are standing by to take your application?

4 Responses

  1. Just want to say that teaching our children is fine. However, very often hardships are beyond our ability to easily teach or correct. Most people that get in trouble with debt, whether it be credit cards, student loans, autos, or mortgages, are in trouble due to job loss, loss of income, medical reasons, divorce, or other extenuating circumstances beyond control. It is these people that are most taken advantage of. In fact, it this people that are most often “targeted” by Wall Street because these people can be assessed higher interest rates and full payment is demanded even when these people struggle to get back on their feet.

    TransUnion says that people are paying their credit cards before their mortgage just to survive, that is, put food on the table, prescriptions, school supplies for children. Income distribution gap is widening – and much as been siphoned from the middle class. The Great Depression affected many – including the wealthy that lost much of their savings (credit cards were not the norm back then). To date, the wealthy have escaped significant loss. But despite what the optimists say, our economy is in very bad shape. From the words of a private equity wealthy businessman – CASH IS KING.

  2. “This is how american government works”
    Its a slow day in a little East Texas town.. The sun is beating down, and the streets are deserted. Times are tough, everybody is in debt, and everybody lives on credit.. On this particular day a rich tourist from back east is driving through town.

    He stops at the motel and lays a $100 bill on the desk saying he wants to inspect the rooms upstairs in order to pick one to spend the night..

    As soon as the man walks upstairs, the owner grabs the bill and runs next door to pay his debt to the butcher.

    The butcher takes the $100 and runs down the street to retire his debt to the pig farmer.

    The pig farmer takes the $100 and heads off to pay his bill at the supplier of feed and fuel.

    The guy at the Farmer’s Co-op takes the $100 and runs to pay his debt to the local prostitute, who has also been facing hard times and has had to offer her “services” on credit.

    The hooker rushes to the hotel and pays off her room bill with the hotel owner.

    The hotel proprietor then places the $100 back on the counter so the rich traveler will not suspect anything.

    At that moment the traveler comes down the stairs, picks up the $100 bill, states that the rooms are not satisfactory, pockets the money, and leaves town.

    No one produced anything. No one earned anything.
    However, the whole town is now out of debt and now looks to the future with a lot more optimism.

    And that, ladies and gentlemen, is how the United States Government is conducting business today.
    Author unknown



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