According to a Capital One study, 78% of teens rate their knowledge of personal finance between “average” and “poor.” These young people will soon be getting offers for credit cards and bank accounts – financial tools that if they use irresponsibly could bury them in debt and harm their financial good name for years or even decades. Clearly, teens need some financial training before they venture out on their own.
So how can you give your teens the personal finance education they’ll need? There are plenty of tools to help you. But first it’s a good idea to get a sense of what your teen knows – and doesn’t know – about how money works and how to handle it responsibly. Here are a few basic money questions you might want to ask them (excerpted from an online course I helped write, www.MoneySavvyTeen.com):
1) How do banks make money?
A Consumer Reports survey found that an amazing 40% of students do not know that banks charge interest on loans.
Ask your teens if they know how banks use your money to generate revenue for themselves. The answer might surprise you.
2) Can you name three ways advertisers send you their ad messages – other than commercials, billboards and ads in magazines and newspapers?
Your teens are exposed to more than 4,500 advertising messages each day – some so subtle that they might not even realize it – such as in-game ads, product placement on TV, brand mentions in songs, etc.
Thanks to technology, your teens are more sophisticated than any group of consumers in history. But do they understand that the clothes they see their favorite stars wearing at a movie premiere are often just clever ads by the designers? Do they know that the cell phones and name-brand beverages they see on TV are often paid for by the manufacturer to influence them? Ask them.
3) Can you think of two ways you could be charged for withdrawing money from your own bank account using your ATM card?
When your teens open their first checking account, they will almost certainly receive an ATM card or ATM debit card. Do they know that using these cards at another bank will likely cost them more than $2.50 per use – even just to take out $20? Do they know that they could be charged twice – once by the ATM machine owner (a bank, a convenience store, etc.) and again by their own bank?
4) Why is a strong credit report important?
If your teens know what a credit score is at all – and many do not – they might understand that it can affect whether they receive loans in the future.
But do they know that a strong credit report (free of late payments and other negative issues) can also affect whether or not they get the apartment they’re applying for? Or even the job they want? A credit report accounts for much of a person’s financial good name – and it can affect more areas of our lives than we realize.
5) How does a credit card work?
Given that the average American household had $11,000 in credit card debt in 2009, it is unlikely that a typical teenager has a strong understanding of how the cards work. (“So I can buy $800 worth of stuff with the card this month, and then pay only $10 when the bill comes? How do these guys stay in business?”)
Ask your teens if they understand, for example, that “charging an item” on a credit card, rather than paying for it with cash or writing a check, is actually a form of borrowing. Ask if they understand the financial danger in charging up a large balance on their card and not paying it off every month.
Opening the lines of communication with your teen can only help. When it comes to money, teens have questions.