Teach Your Children Well


Some of you may recognize the title of this article as a song made famous by the band Crosby, Stills, Nash, & Young in 1970.  The timeless lyrics reflect on a relationship between parent and child and how they might benefit from the experiences of each other when confronting the stresses of growing older. 

           The song came to mind the other day after talking to a friend about the plight of his young adult son.  The son had recently moved into an apartment of his own and was struggling to understand – much less manage – the credit card debt he was accumulating.  Knowing that the son might listen to the wisdom of a random stranger over that of his own parent, my friend asked if there was some simplified material that might help to illustrate the perils of run-away credit card debt.

Some quick research on YouTube (which is now convinced that I have a serious debt problem!) revealed a ton of material.  I was struck by how many videos there were on credit cards and the apparent confusion over standard industry terms.  If you’ve successfully tamed your own credit card monster in the past, it’s easy to forget the inner workings of grace periods, billing cycles, annual percentage rates, and minimum payment amounts.  There was one item that really caught my eye, however, as I had forgotten that it even existed: the payoff chart that’s required by the Truth in Lending law to be included in every credit card statement.

Here's an example:

A credit card with numbers and a few words

Description automatically generated with medium confidence

These days, a balance of $1,273 isn’t necessarily indicative of a spending spree.  Given inflation, the high cost of housing, and student loan debt, it can be incredibly difficult for newly independent adults to balance their finances.  If they’re charging day-to-day items to help manage monthly cash flow, it can be tempting to make only the minimum required payment if things are tight. If that practice is continued month after month, however, the financial penalty can be prohibitive. 

The minimum payment in this example of 2.5% of the outstanding balance is within the typical range of 2-4%, which can be a real danger zone for those who don’t fully understand its implications.  Even under the unrealistic assumption of no additional charges, making only the minimum payment would require 7 years to fully payoff the debt and result in total payments of nearly 170% of the purchase amount!  A Market Watch study from 2015 put this practice in stark terms:

"It takes less time to raise a child to adulthood than it would to pay a $2,000 credit card debt with minimum payments. For example, a $2,000 credit balance with an 18% annual rate, with a minimum payment of 2%, would take just over 30 years to pay off."

The result can be one where the card holder is paying multiples of the original price for a purchase that has long since been forgotten.  If you’re looking for an objective way to illustrate the potential dangers of credit card spending, there are few better ways than to use the information provided to your child, grandchild, or family friend every month by the credit card issuer.