Diana Clement: How to save teens from the credit trap

Getting sucked into the credit card trap seems to be a teenage rite of passage in New Zealand.

Every year, plenty of teenagers and those in their early 20s rack up huge debt - sometimes in the tens of thousands of dollars. Believe it or not, 863 people aged under 25 were granted insolvency in the 2009-10 year. Some 16-year-olds have even declared themselves insolvent.

The lengths the credit industry goes to to snare young people in debt is scary. Banks like you to be in debt. It's not surprising that they scour tertiary institutions looking for fresh meat - aka new customers.

In this country, under-18s can't take out credit cards or sign credit contracts (hire purchase agreements).

Even so, it's a big leap for an 18-year-old from savings accounts to credit cards and HP debt.

Most finish school with a poor understanding of basic financial concepts. The Young Enterprise Trust, which surveyed 443 of them late last year, found that only eight of 40 basic financial questions put to the students were answered correctly by more than half of the respondents.

It's not surprising that some 18-year-olds go crazy on credit and lose the financial plot. Credit cards open a whole new world to them. They can buy exactly what they want immediately. HP can be even more dangerous thanks to the fees, high interest rates and confusing conditions.

HP providers, such as GE Money and Q Card, are also a lot less likely to be concerned about a young person's overall financial position than a bank, which might be more willing to change the payment schedule or make it easier in other ways to make payments.

It's true that some young people can navigate the minefield of easy credit and come out unscathed. But they're probably in the minority and may be born bean-counters.

Nature plays a role and you can have one child from the same family who has excellent money management skills and another who is driven to spend every cent he or she earns. Both can improve their money management with nurture.

It's best to start really young. As soon as it dawns on children that money buys things, they can be exposed to concepts such as working for money, saving and the implications of spending money you don't have. This column isn't about how to teach young children about money; it's about saving teens from the credit trap.

Parents can actively teach teens about the dangers of credit. There are a few concepts that they just need to know.

It's really important at this stage that young people understand the difference between credit and cash, says financial planner Susanna Stuart, of Stuart + Carlyon Financial Advisers. Some simply don't realise that a $500 limit on the credit card isn't $500 of their money.

Encouraging teenagers to pay for services in advance can have a positive impact on their financial learning.

It's a good lesson that once their pre-pay credit on mobile phones has run out that they need money to pay for the top-up.

Visa debit cards are a good alternative to credit cards and HP. They allow young people to buy goods online or pay for subscriptions without getting into debt. These cards, which have been available overseas for many years, are linked to bank accounts, meaning the card-holder can only spend money in their accounts. They're available to over 15-year-olds - although, until they're 18, a parent will have to sign the application.

There are some common traps that parents fall into. Lending children money at any age can set them up for disaster. My children tell me I'm mean when I refuse to lend money, to which I always reply that it's one of my duties as a parent to teach them good money management.

Stuart recommends that parents who do choose to lend money should charge children high interest rates - as much as $5 interest on every $10 borrowed. She says it's a disincentive to borrow.

Nor is rescuing children financially at any age a good idea. You may want to give them an incentive to solve their financial problem. But digging them out encourages a repeat.

Leading by example is a problem that confronts many parents who aren't good with money themselves. If children have seen parents buy everything they want on credit, struggle with paying bills on time, and fail to have a budget, they're starting their financial lives with a handicap.

"Parents have to show they can live within their means," says Stuart. "They can do it by example and say 'no'." Fortunately, the global financial crisis has encouraged many parents to pull their heads in and start spending sensibly again."

Peers can also set a bad example. They may buy goods willy nilly on HP or get a second credit card when the first one maxes out.

Getting the conversation started on money matters can be difficult. You will need to engineer situations where the teenagers and young adults must talk about their money and financial situation.

The saying families that eat together stay together is valid for late teens and young people. Sitting around the dinner table is a great time to discuss finances. But it's important not to moralise or manipulate.

A friend of mine suffered this from his father, who thought it was his right to comment on his son's life because he had lent him the deposit for his first home.

You're going to have more success as a parent if you accept that generations live differently and look for solutions that your children can work with. Something such as an iPhone or iPad, which may be unimportant to the older generation, may be of great significance to younger people.

One big problem when it comes to talking to young adults about their money is that they communicate differently, says Stuart. They're more likely to keep in contact with parents by text, Facebook and other modern communication tools than by actually fronting up in person.

"Parents lose control of where their children's lives are," says Stuart. "It makes it hard for them to impart good money skills."

Nor can teaching good money habits within the family be done in isolation. "You need a holistic approach to financial learning," says Stuart, author of Start Talking Cents, who has a sociology degree majoring in educational psychology and has a particular interest in how people think and behave in regard to money.

Some offspring just don't listen. If you're not getting the message through and you can't come up with a better approach, then pointing them to some useful resources is a good fall-back.

There are financial books aimed specifically at young people. Or direct them to Sorted.org.nz's Get Into Debt calculator and the site Spendometer, which looks at how the way you pay can affect the cost of what you buy.

Another potential slippery slope that needs to be managed well by parents is student loans. This is when the evils of credit really set in for many younger people.

It can be easy to take the loan and blow it. After all, when you're 21, the idea of paying the loan off in your 30s is just too distant to comprehend.

Although student loans are interest-free and young people are learning that they need to pay for their education, it can leave them in a situation where they think debt is the norm and they cannot or will not escape it.

Stuart has worked with some parents who have chosen to go half and half with their offspring in paying off the student loan.

This will only work, however, with children who appreciate that their parents are giving them a leg-up in life.