You are pre-approved…for debt

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Teenagers may be at risk of developing bad credit and not even know it. Enticing credit card offers targeting young adults are showing up in mailboxes with greater frequency all the time, and delivering with them one of the many potential financial pitfalls facing today’s teens. Credit card companies package their offers in attractive ways that on the surface can almost sound like they are giving you free money: “You are pre-approved,” teases one envelope, while another flier advertises “Cash back on all purchases — low minimum payments!” These are just a few of the ways companies get the attention of prospective customers, and for young people inexperienced in financial matters, they may be hard to resist.

When you open the envelope with a credit card offer, the selling points are in large type. The dangers are found in the tiny type, where you learn things like you will pay an interest rate of 20 percent or higher, you may be penalized with late payment fees, and your interest rate may increase with even one late payment.

71MH9ATF4SAnd credit card holders often don’t realize just how big a chunk of the minimum monthly payment is eaten up by the finance charge and what that means in terms of total debt and how long it will take to pay down the principal. “You could double your debt in just a few years,” said Terrance K. Martin, an assistant professor of finance at the University of Texas Rio Grande Valley. “I have seen many students who maxed out their credit cards because they didn’t realize what it took to make payments.”

Martin works with college students to develop sound financial habits and learn to handle debt in responsible ways. He said young people coming out of high school and headed for college are at risk of hurting their future financial security if they don’t learn some basic lessons early in life.

“When they start college it’s a different ball game,” he said. “They are being asked to be complete adults who think for themselves.”

Martin suggests that early involvement by parents is the best way to learn fiscal responsibility. “Having access to credit cards and building a credit profile from a young age is valuable, but you have to be careful,” he said. “You have to start at a young age and we can be creative on how we do it.”

One way parents can help is to put their teenagers on one of their credit existing card accounts. That gives the young adult experience in managing credit spending, and parents can monitor their credit card use. Another idea would be for parents to set up their child with a pre-paid debit card, giving them the experience of using the card but with limits. When the money is gone, it is gone and the card can’t be used anymore.

And parents can help youngsters at an early age by showing them that money needs to be earned. They can pay children for chores around the house and then let them make decisions on how best to spend that money.

Taking an example from his own early life, Martin said his first lessons in money management came from watching his grandmother save and be thrifty in what she purchased. Today he applies those same lessons with his children, helping them make wise choices. Not long ago Martin’s daughter asked him to buy her a pair of the latest and most fashionable — and expensive — athletic shoes. He engaged her in a discussion about what was most important to spend money on. An aspiring artist, Martin’s daughter wanted culture but he led her to what she needed: art supplies.

“You have a dollar and you need to make a choice. You have X amount of money and you must make the right decisions,” he said.

Martin said he sees college students on an almost daily basis struggling with finances. He is an advocate of more financial literacy education, and he spends time educating young people in the benefits and dangers of using credit and managing money. “I do the financial literacy aspect under the service aspect of my job,” he said about his efforts to reach out in communities to teach money management to young adults. But he would like to see these lessons become firmly ensconced in high school and college curriculum.

“We need a class in personal finance at the freshman level,” he said. Martin proposed such a course and in 2015 a pilot program was approved with 150 students enrolled but it was canceled at the last minute, for reasons he never learned. Martin also served on a Texas state curriculum committee to help develop a personal finance course for high school students. Last year it became mandatory for Texas high schools to offer the class as an elective, but it’s not a class students are required to take.

“That’s unfortunate but eventually I think it will go that way,” he said of his hope that financial literacy will be taught to all high school students. Perhaps the most important financial decisions facing teenagers is how to pay for college. “I think if you are in high school, start engaging career and college counselors for guidance,” Martin said. “You will be able to make your own decisions with that knowledge.”

Financial aid and student loans can be beneficial to students needing help paying for higher education, but they rarely cover all the financial demands of college. “Not all financial aid programs are equal from school to school,” Martin said. “They cover maybe only up to 80 percent.”

For many UTRGV students coming from the low-income segments of South Texas where parents are often unable to help with expenses, paying for college also means finding a job. And while that may help financially, Martin sees it as a potential obstacle to student success. He suggests that young people entering college should minimize the time they work during the first couple of years. “Ninety-five percent of my students work and they are not as focused on school at times,” he said, adding that the time students spend working can affect not only their education but their ability to find a job after they graduate.

Navigating personal finance can be tricky enough for adults, which makes it even more important for young people to get an early start. Here are a few simple tips based on advice from Martin and an article in U.S. News and World Report:

Be responsible

Parents can help here by giving their children the freedom to manage their own budget. Parents should be strict with the money they give them and not bail them out if they overspend. And it’s never too early to start saving for the future.

Make a budget

Teenagers should learn how to balance a budget, which can be as simple as tracking how much money is coming in and going out and never spending more than they earn.

Manage debt

Everyone has to borrow money at some point. Learn the difference between types of loans and credit cards. A student loan is often essential and is strictly regulated. Credit card use should be minimal or avoided altogether due to high interest rates.

Read the fine print

It’s boring but it can help teens avoid poor financial decisions.

Track your credit score

Credit scores are used to assess people for loans, credit cards and mortgages. A bad credit score can cause big problems in the future.

Protect your privacy

Billions of dollars are stolen from people through identify theft and financial fraud. Be cautious about giving out personal or financial information in person or online.