Credit. Today’s consumer climate all but requires its members to have credit of some sort. Many jobs require credit checks, and nearly every utility company has a deposit based on your credit score. While I may not understand all the intricacies that the credit scoring process entails, I do understand one thing: thanks to careful use of my credit, I didn’t have to pay a $400-1000 deposit just so I could get myself setup with a cell phone company.
I think society today has a fundamental misunderstanding of what credit is, and how one goes about using it. Credit seems to be looked at as an equivalent to overspending, to debt, to despair, or desperation. Credit need not be any of these things; rather, it can be a way to help manage your spending, manage your finances, and help you achieve a standard of life well above what you may have previously considered, while still remaining within your means. The misunderstanding is purely a lack of education.
I was raised with the philosophy that there’s no better way to learn than by doing. That said, this philosophy is exactly how nearly everyone in this country learns about credit. The only problem is, they don’t get to experiment or make mistakes until the stakes are too great to allow for mistakes. When your only option to learn-by-doing with credit is to take out an actual credit card, and make decisions that affect your actual credit score, the likelihood of making some catastrophic error in judgment is multiplied. Then, you’re stuck with a decision that will haunt you for a good many years to come.
In a commercial era in which companies have repeatedly shown that consumer protection is non-existent (vis-a-vis the home lending debacle, other credit crises, etc.), education is key in avoiding those costly mistakes. I think there’s an easy, inexpensive way to teach young people the perils and benefits of credit. In effect, this would be a credit sandbox, a fully-functional credit environment, in which the user is free to use the extended credit however he or she wishes, but within safe confines, and any mistakes would not have any long-term ill effects.
Here’s what to do: This sandbox can be created by anyone for anyone else. So, parents, grandparents, aunts and uncles–anyone–can help teach a younger loved one how to use credit. To set this up, simply purchase a reloadable pre-paid card from any of the major credit companies. Load this card with whatever amount you deem appropriate (for example purposes, I’m going with $100). The amount should be something reasonable (even if available credit on credit cards is often unreasonable).
Hand off the card to your loved one, advising them that with great power comes great responsibility. She may use the card without restriction, purchasing or paying for whatever she wishes. Set a monthly “cycle” date, on which payment will be due. This payment can be the full balance of the credit extended, or it can be a minimum payment based on the amount of credit currently extended. The payment is then added back onto the prepaid card, restoring the amount of credit available.
If a minimum payment is made, some “interest” penalty will be assessed. Since we’re not in the business of making money off of our loved ones, that interest can be deposited into an UTMA savings account or other similar fiduciary account, which the user will receive benefit of once he or she comes of age. Alternately, if the interest component is too complicated, it can be skipped altogether; however, the point is to paint as accurate a picture as possible of the way credit actually works.
This sandbox structure allows the student to make choices, whether good or bad. If the money is all spent on junk, it won’t be available for more important or more desirable purchases. Additionally, if the whole balance isn’t paid off, the student will have to learn to adjust spending to ultimately pay off the debt, or eventually the available credit will dwindle to nothing, and the minimum payments may become difficult to pay.
Of course, the hope is that the credit will be used responsibly, and payments made promptly, and our student merely gets to practice good habits in managing money and credit. If the credit is not used quite so responsibly, though, how better to demonstrate the hazards of poor credit management than simply practice in traversing them? The consequences of irresponsibility here are less severe, as the debt can be paid off in a number of ways, whether it be payment arrangements or simply having them work it off doing odd jobs here or there. The point is, there are consequences for irresponsibility with credit, and having to do some odd jobs is far more tame a sentence than life-long ruined credit because of an irresponsible mistake borne simply out of ignorance of the rules of the system.
Even in the face of irresponsible spending, hope remains that these mistakes will serve as first-hand teachers. In this case, an entire future isn’t ruined, just maybe a few weekends spent working in the yard. These mistakes, once made, should prove to be beneficial, in that they will not be repeated in the real credit world, where consequences are far more dire. As the old saying goes, “an ounce of prevention is worth a pound of cure,” and practice equals prevention.