Friday, May 20, 2016

Don't Let Teens Confuse Credit Cards With Emergency Funds

Credit Card, Not Emergency Fund

“I’m getting you this credit card for use in emergency situations only!”

That’s a very common refrain from parents with kids in high school and college. And, it makes a lot of sense too. No parent wants a kid stranded somewhere far away with an empty gas tank and no means of payment.

The problem comes when kids grow up thinking an emergency credit card is the same thing as an emergency fund. It’s not. It’s an emergency loan. Your teen needs to pay it back. Immediately.

And where does that repayment come from? Not you! From your teen’s emergency fund.

That’s right, your teen needs an emergency fund too.

Just open a separate savings sub-account or low cost prepaid card to serve as a modest emergency fund for your teen. Mandate that it be funded with a couple hundred dollars. Whenever your teen racks up an emergency payment with the credit card (or gets that first ticket or breaks that smartphone), cover it immediately using the emergency fund. Then, insist that replenishing the depleted fund becomes your teen’s top financial priority. Rinse and repeat with each emergency.

Teens who understand credit cards are not emergency funds will avert much bigger emergencies down the road — like crippling consumer debt.

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