You’ve talked to your kids about stranger danger, the importance of wearing seat belts, that smoking is allowed only if they’re on fire and even then you’re not so sure, that they should never swallow a Tide pod, that drugs are a dead end and that no means no. Maybe you’ve even thrown in some advice that if you fall into quicksand, thrashing about is the last thing you should do.
But have you told them about the financial foes they will sometimes face?
It can be easy to decide not to say anything. They aren’t adults yet, after all, and do you really want your teen to lie awake at night imagining how they may someday be lying awake at night wondering how they’re going to pay off a $3,000 credit card with a 29.99 percent APR?
Still, if you really want to check all the boxes of what your kids should stay away from, make sure to include some of the financial boogeymen they may someday encounter. If you’re wondering what money-wasting things should be on your list of no-nos for your kids, talk to your teens about the traps below.
1. Payday loan stores
It’s understandable why some people are drawn to payday lending stores. If you’re broke, and you don’t have a paycheck coming for a while, and you don’t want to ask your friends and family for a loan, you may feel you have no choice. In fact, it has been assumed that a lot of federal employees during the recent government shutdown turned to payday lenders. Payday loan stores don’t ask you for a credit score, which is another reason they’re tempting, but they will ask for things like your checking account and routing number.
As you probably know, payday loans are expensive. In some ways, they don’t look so bad at first. Generally, for every $100 you borrow, you’ll pay back that $100 and an extra $15. So if you borrow $300, you’re paying back $345. If you really need that $300 to pay an electric bill, paying back $345 later won’t seem too terrible. But, as you can explain to your kids, if your next paycheck is $500, after you pay the payday loan store $345, you’ll have only $155 left. And if that $155 runs out before the next paycheck, what might you do? Go get another payday loan.
Claire Pearson is an Atlanta-based life coach with two kids, 15 and 11.
“When we see payday loan company commercials ― and now there is a new app that lets you get paid before you actually get paid ― we have conversations about budgeting,” she says. And if your kids never watch TV with you because they’re on their devices watching YouTube, so you never see those ads, bring it up the next time you pass by one of the gazillion payday loan stores in your town. Your teens may not look like it, but they’ll listen.
“There is an ongoing conversation in our house about living within your means and paying yourself first. Ideally, you don’t want to be living paycheck to paycheck,” Pearson says.
2. Car title loans
Now, payday loans can seem like the smartest thing ever when you think about car title loans in comparison. You may lose your shirt with a payday loan, but with a car title loan, if you have trouble paying the money back, you can lose far more than your wardrobe. That’s because you hand over your actual car title as collateral.
Chantay Bridges, a mom, business coach and real estate agent in Beverly Hills, says that she can see why some people buy into the idea.
“You are under the presumption that when you get paid, you will make your loan good and obtain your title back,” she says.
But this is a good time, she says, to talk to your kids about the what-ifs.
“What if you don’t get paid? You could get laid off. Your employer could file for bankruptcy. You could go sick and be unable to return back to work. Just about anything could happen that you did not expect. Now, in addition to your job lost, you could lose your vehicle, too.”
She adds something else to mention to your kids: “You’ve given them the full right to take your car in the event you are unable to make a payment. Let’s not forget, they have a copy of the keys to your car.”
3. Rent-to-own stores
As you likely know ― but maybe your kids don’t ― rent-to-own stores are notoriously expensive. They seem cheap, since you typically pay a small amount of money per week for a TV, refrigerator or sofa, for instance, until one day you own the item. But over the life of the loan, which is often 12 to 24 months, you end up paying anywhere from two to three times the amount.
This isn’t like buying a house, which you will pay a lot for in interest but someday you may sell, and probably for far more than the original selling price. It isn’t even like taking out a loan for a car, which you will probably use as a trade-in for another car someday. The $600 sofa that you paid $1,200 for through a rent-to-own store will someday wind up in a cousin’s basement as a hand-me-down.
But you know all of this, so we should probably spare you the lecture. Do your kids know this? Have you brought up how expensive these stores are? You likely see them throughout your neighborhood, maybe near the payday loan or car title stores. Tell your kids that when they’re driving by them, they should keep driving.
It may help, especially if your teenager has a job, to talk about how much they would have to work to pay the interest on a rent-to-own purchase or any interest on a loan, says Beth Logan, the lead tax adviser at Kozlog Tax Advisers in Chelmsford, Massachusetts.
“Have teens consider the number of hours at their current job ― after taxes ― that they have to work to purchase the item they want to buy,” she suggests, adding, “Even if the parent is buying the item, the teen should consider, ‘Is this worth working eight hours?’”
4. Store credit cards
You’re probably well aware that a store credit card’s 30 percent interest (typically) is not a great deal. Your teens may not be so aware. Then, of course, there’s the fact that lenders like to see the credit utilization ratio at 30 percent, which means that ideally you never use up more than a third of your credit on a store credit card. So a shopping spree, even if you pay off the card soon, could ding your credit.
Store credit cards can work out fine for some people, but as you’ll want to tell your teens, what if they aren’t one of those people? A store credit card can be a gateway drug to a lifetime of revolving debt and low credit scores.
5. Food delivery services
Using them every once in a while, sure, fine. But “don’t make food delivery service a habit,” advises Adam Glassberg, a financial adviser at Savant Capital Management in Downers Grove, Illinois.
“Food delivery services have exploded in recent years, as companies such as GrubHub and Uber Eats provide delivery from restaurants that didn’t offer this service as recently as two years ago. As convenient as it can be, both dining out and paying delivery fees and tips can turn into a money pit if done routinely,” he says.
It’s hard to argue with that. True, if you’re driving out to get the food, you’re paying some gas, and your time is worth something. But generally you’re paying $4 to $8 per restaurant order for these services, and that doesn’t include paying a tip. And it isn’t as if restaurant food is cheap to begin with.
Still, it’s no payday loan or car title service. That said, if you use food delivery services enough, you may feel like you need to take out a payday loan.
Of course, this is hardly a comprehensive list. We haven’t even mentioned buying a new car that you can’t afford or loan sharks or vacation rental scams or catfishing scams. People who want to fall asleep count sheep. If for some reason you want to lie awake at night, you can think about all the financial traps awaiting your kids when they become adults.