Graduated drivers' licenses -- which restrict when and with whom young people can drive -- seem to do a pretty good job reducing auto accidents and fatalities.
Perhaps it's time to adopt something similar to ease teenagers into their financial responsibilities.
Right now, adolescents can sign themselves up for life-crushing debt years before they can legally drink, and sometimes before they're even old enough to vote. Some of this debt -- specifically, student loans -- can literally follow them to the grave, since it typically can't be erased in bankruptcy court.
We've talked ourselves blue in the face about the need for financial literacy education, and it isn't working. The little that is getting taught is being overwhelmed by the relentless marketing of student loan companies, credit card issuers and other lenders.
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I'm not the only one who thinks we need to do something drastic to prevent another generation from being enslaved by debt. Recently, Sen. Christopher Dodd, D-Conn., introduced a bill that would place unprecedented restrictions on credit card issuers that target teenagers.
The Credit Card Accountability Responsibility and Disclosure Act of 2009 would forbid card issuers from opening accounts for people under 21 unless one of these criteria is met:
- A parent, guardian or other responsible individual agrees to co-sign for the debt.
- The applicant provides proof he or she can independently repay the debt.
- Proof is provided that the applicant has completed a certified financial literacy course.
The bill also would prohibit credit bureaus from adding people under 21 to the marketing lists they sell lenders and others without the young people's consent. People under 21 would have to "opt in," or give their permission, to receive credit card solicitations.
The bill is good as far as it goes, which is about a country mile short of far enough.
Here's what I propose.
No credit cards until you're 21Instead, you can have a charge card, which will help you learn to use credit the right way: as a convenience, rather than a tool to live beyond your means.
Credit cards allow you to carry, or "revolve" in industry terms, a balance. Young people with tiny credit histories get charged usurious interest rates for the privilege of failing to pay off their balances.
By contrast, a charge card requires you to pay your balance in full every month. Used properly, it can help build your credit history. (The most famous charge cards are the traditional green and gold cards offered by American Express.)
This is somewhat analogous to graduated licensing requirements that require young drivers to go solo or travel only with a responsible adult. This restriction helps novice drivers learn good habits by limiting distractions.
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And that is what minimum payments, teaser interest rates and the other trappings of credit cards are: distractions from the key habit of paying your balance in full every month. Inculcating this habit is one of the smartest things we can do for the next generation. If they can learn that, their odds of getting rich soar, and their odds of filing bankruptcy plummet.
Charge cards to people under 21 should be issued according to Sen. Dodd's restrictions: Applicants would need parental OK, proof of independent income or completion of a financial literacy course.
Will bankers issue charge cards if their young customers can't be sheared with outrageous interest rates? Some won't, but others are sure to see the opportunity in earning young customers' loyalty early on.
No payday loansThe military finally chased these bloodsuckers away from their bases by prohibiting anyone from charging a soldier interest rates in excess of 36%. Since the annual percentage rate of a typical payday loan is around 400%, this was an effective strategy.
But there are still more payday lending outlets in the U.S. than McDonald's and Burger King restaurants -- combined. Payday lenders prey on the financially unsophisticated, who don't understand that a short-term cash advance loan can easily spiral into unmanageable debt. (For more, read "Loans with triple-digit interest.")
Perhaps Congress one day will put legal loan sharks out of business, but in the meantime we can demand that payday lenders stop preying on our kids. In fact, I'd restrict anyone under 21 from even entering a payday lenders' premises, so young children wouldn't have to be witnesses as their parents ruin their financial lives.
This would be the curfew component of the financial driver's license. Graduated licenses typically demand young drivers stay off the road at night, because that's when the seriously bad stuff happens. Keep kids out of payday lenders, and the chances of seriously bad stuff is a heck of a lot less.