Financial Responsibility Should Be Taught at Home
Dear Liz: I just wanted to express my appreciation to you for addressing the subject of credit and teens. I’m 20, and everything -- and I mean, everything -- I learned about credit I learned on the Internet. Scary.
My parents felt, as many parents do, that credit cards were not something that a college student is capable of handling. Given peer pressure and the culture of college life, they expected that I would find myself in all sorts of terrible debt if I so much as obtained an ATM card.
Of course, like any rebellious teenager, I got a credit card anyway -- two weeks after moving out of their house. I used it to buy groceries and paid it off in full each month. After six months, I got a credit card through my credit union with a much better interest rate and a higher credit limit. Three months after that, I was approved for a used car loan in my own name for about $6,000. Not bad for an 18-year-old. I paid double the minimum payments. A year later, I got a gold credit card with a 12.9% APR.
I run my credit report every three months to watch my FICO score increase, which has taught me how credit scores are determined. It also motivates me to continue building my credit record by paying off balances each month and always, always, always paying on time. I will be 21 next month, and my FICO is above 700. I understand financial management and will continue to be responsible with my money.
Students are bombarded with advertisements in the mail, on every campus billboard and on every other Internet site they visit. They also get a lot of bad advice. “Just use your credit card for beer and you won’t have to pay till the third time the bill comes” was something a roommate once told me.
If parents would address credit issues with their children, explain the importance of establishing a good credit history and talk about using credit responsibly, then maybe there wouldn’t be so many problems. Thank you for encouraging this.
Dear reader: Thank you for writing. Many teens are far less informed and responsible, which is why so many people graduate from college with big credit card bills along with a massive student loan debt.
Parents, consider this carefully. Four of five college students have a credit card, and once they’re out of your house you don’t have the same opportunities to teach them about responsible money management.
Consider setting up a checking account for your high school or even middle school student. Once they’re comfortable balancing their check book, an ATM or debit card can give them experience in using plastic. Many parents eventually add their teenagers as authorized users on a credit card. This allows parents to monitor spending and teach the importance of paying off balances in full every month.
Once children turn 18, they can get credit cards on their own, and most of them will. Make sure they know how to use them or they could spend the rest of their lives paying for their mistakes.
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IRS Exception Allows Tax-Free Annuities
Dear Liz: I am a CPA for a law firm that specializes in personal injury cases. I enjoy reading your Money Talk column each week with its good practical advice and I like the fact that you never let people avoid personal responsibility for their problems.
That being said, I would like to point out an error in last week’s column regarding the woman who was about to receive a lawsuit settlement. She was considering paying off her mortgage but was told by her attorney to invest the money instead in a tax-free annuity.
You advised her that annuity earnings when withdrawn are taxable at regular income tax rates. There is an exception to this in IRS Code 104(a)(2) that excludes amounts received in damages for personal injuries from taxable income. This applies to the annuity earnings when the personal injury settlement is placed in an annuity so that none of the annuity payments are taxable.
Dear reader: Thank you for writing. Several other readers, including one who was receiving payments from such an annuity, wrote to point out the exception.
Instead of receiving a lump-sum settlement, the money can be received over time as an annuity. If the settlement was intended to compensate the victim solely for personal injuries and does not include lost income or other taxable damages, the annuity’s payments can be tax-free, said Mark A. Luscombe, principal analyst for tax research firm CCH Inc.
Because the reader wrote about using the money for retirement, I incorrectly assumed she was talking about a regular deferred annuity. In my response, I told the reader that her lawyer’s recommendation of a “tax-free” annuity was evidence that he wasn’t competent to give her financial advice. I still believe she should consult an independent fee-only financial planner before deciding what to do with her settlement, but this is a case where I should have taken my own advice first and gotten an expert, outside opinion.
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Liz Pulliam Weston is a contributor to The Times, a columnist for MSN Money and a graduate of the personal financial planning certificate program at UC Irvine. Questions can be sent to asklizweston@hotmail.com or mailed to Money Talk, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012. She regrets that she cannot respond personally to queries.
