> Posted by Mr. Provocative
Looking through the mail yesterday, I came across a credit card application addressed to my teenage stepdaughter, who recently turned 18. It was one of the first in an avalanche of such offerings for financial services she will receive this year, indeed for the rest of her life. The seductive promise of the first credit card is a rite of passage into young adulthood and one fraught with untold risk for this generation of Americans – notwithstanding the fact that banks, and the financial services they provide, have led to phenomenal wealth creation and the most successful property-owning democracy in history.
This got me to pondering the extent of my stepdaughter’s financial literacy and her readiness to make a thoughtful evaluation of this and other such offerings. She certainly hasn’t received it from me. (In the spirit of full disclosure, I have never learned how to balance a checkbook or read and comprehended the boilerplate on my credit card statements.)
Sadly, my ignorance of the financial basics is hardly aberrant and may even be closer to the norm, as a little research quickly indicated. According to Niall Ferguson, author of the new book, The Ascent of Money, “a substantial proportion of the general public in the English-speaking world is ignorant of finance.”
Ben Bernanke sees this state of affairs as a critical threat to our nation’s health: “Financial literacy and consumer education – coupled with robust consumer protection – makes the financial marketplace effective and efficient, and better equips consumers to make tough yet smart financial decisions. Today, only eight states (not ours )across the U.S. require personal finance before middle or high school graduation.”
But would having a basic grounding in such topics as maintaining creditworthiness, borrowing on favorable terms, and managing debt really prepare my stepdaughter to make judicious decisions about her finances? I have my doubts.
Financial Literacy 101 would surely provide my stepdaughter (and me) with some useful guidance but will it protect her in the end from profligate spending and other financial folly? Intellectually understanding what we should do to protect our interests does not inevitably lead any of us to rational decision making. The proverbial masters of the universe, fooled by Bernie Madoff’s Ponzi scheme, are evidence enough that even the most financially sophisticated are sometimes making decisions based on something other than careful analysis and due diligence. We are not rational actors as Freud understood long ago and economists are belatedly concluding as well.
Then what hope is there for my stepdaughter wisely using her first credit card? Yikes. For it does seem clear that “intellectually, people value future consumption, but nonetheless give into the temptation to consume today. The internal tension is often depicted as a conflict between a patient “future self and an impatient “present self”…” If true for “grown ups” how much more true for teenagers whose brains are still in formation, with hormones surging. Impulsive, risk taking behavior is arguably the default position of adolescents. And from a very early age, our children have repeatedly seen commercials singing the siren song of the power of credit that can be boiled down to: buy what your heart desires now, and pay later.
It is quite unnecessary to inculcate children to pursue pleasure and instant gratification, because that comes naturally enough. Advertising merely reinforces these tendencies. Prudence and thrift seem quite unnatural and do need to be indoctrinated. Financial literacy will have no prophylactic power unless it is coupled with the restraint that is engendered by these virtues. And it may be that the “scared straight” approach, used with some success in drug prevention and drivers-ed courses in high schools around the country might be effective if incorporated into financial literacy programs as well.
The kindness of strangers and their silken promises are simply not to be counted on. Some credit card companies are not your friends. Their profit margins heavily depend on increasing your indebtedness, not timely repayment. In this topsy turvy world, the “good” customer is the one who doesn’t pay off the entire bill at the end of the month.
“Trust but verify” should be the centerpiece of your relationship with any financial institution you are considering entering into a relationship with. (Yes, like with potential boy friends.) But even if you find a great bank or credit card company to work with, you are not out of the woods yet, because you are probably not wired to make prudent decisions about your spending. Good luck. You will need it.