En español | The buy-now-pay-later benefit of credit cards has not lost its appeal despite the high rates being charged by credit card companies on card balances not paid off in the current billing cycle. It should come as no surprise that many companies want to keep the money rolling in by teaching the debt habit to the younger generation. Here's a recent story of my son's encounter with such a company.
Teaching the debt habit
Because Kevin had turned 18 a few months ago and is heading off to college in the fall, I told him it was important that he establish credit. So we walked a block from my office to Goliath National Bank to open his first credit card. I advised him he would likely have to secure it with a deposit account, much the way I first established credit decades earlier. Though Goliath was where I banked, I didn't want to be listed on the account or even cosign, since the goal was for him to build credit. A good credit score lowers the cost of things like insurance and mortgage rates.
An incredibly nice young banker (let's call him Ben the Banker) sat us down, asked a few questions and then told Kevin he should be able to qualify for an unsecured credit card, since he had already been accepted to college. I was skeptical, but Ben was right, and Kevin secured his first Visa card with a $500 limit, which is a lot of money for an 18-year-old.
Getting used to a credit card
Ben explained to Kevin that Goliath doesn't charge any interest for the first six months of the card, a bank policy to allow young people to "get used to holding a credit card." While Ben was preoccupied with his computer, Kevin leaned over and whispered a question to me: "Wouldn't six interest-free months of credit build a habit of accumulating debt?" I answered, "It sure would," and he gestured with a thumb down, indicating he wasn't going to run up debt.
See also: 6 Ways bad credit costs you money
Pay the minimum amount
Next, Ben explained to Kevin that he could link his checking account to the credit card and set it up to automatically make the minimum payment. Kevin responded that he wanted to set it up to make the full payment, rather than just the minimum. Ben politely told him that he could do that but the bank recommended otherwise, as an unforeseen circumstance could result in Kevin's needing money that might not be available if his checking account balance was too low. Ben advised keeping more money in the checking account by conserving cash and paying only the minimum. Kevin gave him a thanks-but-no-thanks response and requested, "Please set it up to pay the full amount." Kevin said that if he did have such an emergency, he could use the credit card.
Kevin had a distinct advantage having a dad who's a financial planner who regularly preaches against expensive and non-tax-deductible credit card debt. Young adults suddenly being given the ability to buy whatever they want may become overwhelmed by the power. And the bank's discouraging paying back the debt before interest kicks in is, in my opinion, training a new generation to go for immediate gratification and a lifetime of interest payments.
Ben struck me as a very good person who wanted to help Kevin. In fact, I've dealt with him more recently and he's an outstanding banker. I suspect he was merely following the script he was taught by Goliath, and I also suspect that Goliath is no different from most banks.
So encourage the kids and grandkids to build credit. It is necessary and can either be a good thing or bad. Encourage them to use credit cards as charge cards that they pay back in full every month. Discourage them from keeping balances and paying double-digit interest rates. That's a bad habit that can stay with them for life.
And, finally, teach them to monitor their credit score. It has a huge impact on their financial future.
Allan Roth is the founder of Wealth Logic, an hourly-based financial planning firm in Colorado Springs, Colo. He has taught investing and finance at universities and written for Money magazine, the Wall Street Journal and others. His contributions aren't meant to convey specific investment advice.