Help your clients' kids avoid maxing out

Sep 9, 2012 @ 12:01 am

Like most parents, I will do almost anything to help my four boys avoid making the mistakes I did when I was young. If carting out my eighth-grade pictures and letting them yuk it up about how my head resembled a feather duster keeps them from sporting a mullet, then my job as a father will be done.

The same holds true for my financial missteps.

I will be the first to admit that I knew nothing about handling money when I left my parents' home for college. Even though I grew up watching my grandfather reuse tea bags (a practice he picked up as a teenager in the Great Depression), my middle-class parents rarely talked about the family's finances. Consequently, I left home not knowing how to balance a checkbook, invest in a stock or mutual fund, or manage debt.

One of my biggest errors — and the one with the most serious consequences — involved overusing credit cards. While I knew that my parents generally eschewed credit card debt, I never knew why.

Needless to say, when I turned 18 and the credit card offers started rolling in, I went nuts. This was well before the Credit Card Act of 2009, which prohibits credit card companies from issuing cards to someone under age 21 without a co-signer.

Lured by the promise and possibility of “free money,” I accepted every offer and promptly maxed out each card with items I thought I “needed”— a couple of televisions, a refrigerator, a pullout couch and way too much hair product (Hey, it was the 1980s!).

I soon found myself with more than $3,000 of credit card debt. Though that may seem small by today's standards — the average credit card debt per household with such debt is nearly $16,000 — it amounted to more than a year's tuition at the public college I attended.

As it turns out, my experience was not uncommon.

Today, 35% of all college students have a credit card. While about one- third of those students carry no balance, the average outstanding balance is $755, according to a national survey conducted by Sallie Mae and Ipsos, a market research company.

The survey also found that 5% of students with a credit card report having an average outstanding balance of between $2,001 and $4,000.

As stewards of their clients' financial health, good advisers will help prepare clients' children to manage money when they head off to college. This could be done in a number of ways — from offering money management workshops for clients and their kids, to using social media to give students regular tips and reminders about budgeting, spending and debt.

Your clients will appreciate the extra attention, and your efforts will open the door to a relationship between you and their children — most of whom will inherit at least a portion of their parents' wealth.

Of course, like most of life's important lessons, financial literacy begins at home. That's one message advisers should ensure that clients hear loud and clear.

Unlike my parents, my partner and I make it a point to engage our children in conversations about money. We give them small allowances and let them manage their own cash. We encourage them to set realistic goals — such as saving up for a baseball bat — and allow them to deal with the consequences of not meeting those goals if they blow their savings on an impulse buy.

ONE WORD: PLASTIC

Once our boys demonstrate that they can manage cash, we plan to introduce them to plastic. For better or worse, credit cards are part of American life, and we want them to learn how to use credit before the stakes are too high. We wouldn't let our kids drive without taking driving lessons, so why would we let credit card companies approach them before they understand late fees and interest charges?

We most likely will start them off with a secured credit card, or perhaps an unsecured card with an extremely low limit. I know I can't prevent them from making mistakes, but I can arm them with the knowledge and experience they need to make sound financial decisions — at least most of the time.

Frederick P. Gabriel Jr. is the editor of InvestmentNews. Twitter: @fredpgabriel

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