Teach children to have healthy respect for credit

Question: I teach a class in personal finance to ninth graders, and I have an unusual problem. In trying to warn my students about the pitfalls of credit, I'm afraid I've gone too far. The kids tell me they're so afraid of getting into trouble that they aren't going to use credit at all. It wasn't my intention to scare them. I want them to know that credit can be a useful tool when it's used wisely. But they don't seem to be getting that message.

Answer: Relax. Putting a little fear of credit into your students at this age is probably a good thing. Better to err on the side of caution than to encourage them to get into debt when they're not mature enough to handle it.

Besides, your students are still young and haven't been exposed to the credit marketing blitz they'll face when they turn 18. Instilling some skepticism now will make them better able to withstand the pressure and make wise decisions when the time comes.

And keep on delivering the message that credit is a useful tool. Tell your students that borrowing money to buy an asset that appreciates in value — a house, for example — makes sense. So does borrowing money judiciously for their education, which will result in higher earnings over their lifetime.

It can even make sense to pull out your credit card if you use it as a convenience, pay the bill in full each month and rack up rewards points.

Recently I had the pleasure of addressing a statewide meeting of teachers sponsored by the Utah chapter of the JumpStart Coalition for Personal Financial Literacy. I also had the pleasure of watching Dr. Ruby Ward of the state Extension service demonstrate educational software that helps kids see the additional cost of buying something on credit.

To make her point, Ward translated the cost of buying a $500 iPod (with case) into hours worked. Assuming a student cleared $5 an hour working at a part-time job, it would take 100 hours on the job to make the purchase.

If the student bought the iPod with a credit card charging an annual interest rate of 18 percent and paid the bill over 12 months, he or she would pay an extra $52 and have to work an additional 10.5 hours. That puts the cost of credit into language that's non-threatening yet effective.

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Janet Bodnar is deputy editor of Kiplinger's Personal Finance magazine and the author of "Raising Money Smart Kids" (Kaplan, $17.95). Send your questions and comments to moneypower@kiplinger.com.