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HSFPP Weekly Update # 206—Think Twice Before Using Your Credit Card

Message from Flashman: It is easy for teens to become so excited about having their first credit card that they begin buying whatever they want. However, owning a credit card without having realistic expectations of it and without paying it off as often as possible can lead to financial disaster. Having financial goals is a must; and saving money for school, a car, and a house will be among the most important goals that a young person can have for the 10 – 15 year timeframe. Beyond that, they will likely need to save for their own children’s education and for their retirement. Getting behind on attaining these kinds of goals becomes inevitable if they allow themselves to overspend with credit cards. Credit cards are a financial tool, but can cause all kinds of misery if misused.

 

Related Updates:

Update # 136 – Teens and Credit Cards
Update #127 – More Teens Getting Credit Cards

 

Academic Expectations:

Academic Expectation 1.2
Students make sense of the variety of materials they read.
Unit 1-7

Academic Expectation 2.33
Students demonstrate the skills to evaluate and use services and resources available in their community.
Unit 5

Academic Expectation 2.18
Students understand economic principles and are able to make economic decisions that have consequences in daily.
Units 2-6

 

Note to Educators:

Please note the dates on the Web Site Picks of the Week. They were written last year. Since the time those articles were written, the credit industry has been forced to reduce the amount of credit available, even to creditworthy businesses and consumers. So teenagers and college students are less likely, we think, to be sent credit card offers, which might be a good thing in many ways. Lenders went overboard in extending credit for a number of years and we are now all paying the penalty.

Previously we’ve mentioned James Scurlock’s book and movie, Maxed Out, which deals with the overwhelming credit burden and abusive credit practices in this country. We encourage you to mention both the book and the movie to your teenagers this year, and possibly to screen the DVD in your class or 4-H club, as it is not only educational and informative, but also highly entertaining. We believe that Maxed Out is one of the best ways of gaining the attention of young people on credit issues. To learn more, go to their Web site, http://www.maxedoutmovie.com/. The movie is available on DVD and now also on iTunes.

 

Web Site Picks of the Week:

These Web sites provide helpful information about why credit card companies are targeting teens and how to teach teens to be responsible credit card consumers.

“Card Issuers Target Teens for Latest Plastic Attacks” (3/21/07)
http://www.bankrate.com/brm/news/cc/20000508.asp

“Educating Teens about Credit” (1/09/07)
http://www.bankrate.com/brm/news/cc/20070109_teen_credit_debit_card_a1.asp
(Four pages on Web site; don’t miss the rest of the article!)

 

In the New$... Think Twice Before Using Your Credit Card

by Katrina Akande, Doctoral Student in Family Studies, University of Kentucky

When you turn 18, you will receive many credit card offers. In fact, you may have received some offers already. I remember applying for my first credit card. I was so excited at the thought of owning a credit card, having the ability to buy what I wanted, and being able to make those purchases whenever I wanted. I thought that was a great luxury. Ten months after my 18th birthday, I had every major credit card imaginable. However, I had no idea that owning a credit card without monetary goals would lead to financial disaster. Before my 19th birthday, I had incurred more than $2,200 worth of debt. The worst part was that I did not have a job. My parents had no idea that I had the credit cards or the debt. It took me more than five years to pay off the debt because of months when I did not pay, late payment fees, and high interest rates. I’m writing this week’s update with the hope that you will be more informed about how to use credit cards responsibly than I was.

You must set clear financial goals and be able to distinguish between needs and wants, or you could end up like I did.  Needs are things that are essential to your basic survival. On the other hand, wants are items that you could live without, like name-brand clothing or the latest computer game. Especially during hard times, needs must come first.

Remember the concept of needs versus wants whenever you are considering making a credit card purchase. Place the item into one of three purchase categories: need, want, or emergency.  If the item is a need, are you able to pay cash for it rather than putting it on your credit card? Paying cash for an item helps you stay within your budget. It also lowers the possibility that you will not be able to pay off your credit card bill in full each month, which results in a monthly finance charge.

 If your purchase is a want and you use your credit card because it brings instant gratification, think of the penalty: you could be adding finance charges to your account unnecessarily, which means that you actually pay more for the item you want than you would if you paid cash. Also, you might not have the money available for your other basic needs unless you make only the minimum payment on your credit bill next month. This increases your finance charges further, which means you pay even more for what you want.

Let’s say that you buy a computer for $599 on your credit card, rather than saving for it. The interest you pay could add another $59 to the cost of the computer. And making only the minimum payment each month while spending freely could end up costing you more than twice the amount of the items you buy! However, saving for the computer will eliminate the additional cost of interest; and, in only a few months, the price of the computer could come down.

Lastly, using a credit card in an emergency provides you a way to get what you need when you don’t have the cash. For example, it is wiser to charge a car repair on a Sunday when you are out of town than to stay overnight at a hotel and wait for a bank to open on Monday morning. If you have an emergency savings plan, you can pay off your credit card immediately, or at least pay more than the minimum payment in order to reduce the amount of interest charged on your credit card. But you lose the ability to use your credit card in an emergency if your card is maxed out. Don’t find yourself stuck on the road with no way to get home because you charged all those designer clothes and CDs that you didn’t really need!

From Micro to Macro:

Here is something else to consider. If you’ve been following the news lately, you know that the U.S. is in financial trouble because of bad financial practices. Much of this is due to risky home loans that creditors should not have given and that borrowers should have expected they might not have been able to pay off. Some lenders engaged in predatory lending practices, making risky loans look really good to potential borrowers, many of whom did not know the risk. In addition to home loans, the credit card industry aggressively promoted credit cards for many years to college students and even began targeting high school students and younger kids. We are now all paying the penalty for unwise credit practices. The credit industry has been forced to reduce the amount of credit available, even to creditworthy businesses and consumers. This means that some businesses that were not at fault will go under because they can’t get loans, some students will not be able to go on to college, houses will be out of reach for many, and there will be less credit available to everyone. The financial industry is certainly at fault, but they could not have gotten us into such a mess if consumers had been wiser and had only accepted the amount of credit they really needed and could handle.

Think of the trouble you could get into by maxing out all your credit cards and then apply the situation to the entire country. What would happen if everyone maxed out their credit cards? Sometimes a bad financial practice becomes common enough that such a scenario is no longer so hard to imagine.

 

Follow-up Activity:

Go to the Web site, http://www.bankrate.com/brm/calc/MinPayment.asp, and calculate the payment for a balance of $2,500 with an interest rate of 18% and a minimum payment of $62.5.

Questions:

1. How many months will it take you to pay off the balance?

 

1. How much interest will you end up paying?

 

Now go back and add a fixed payment of $150.

1. How many months will it take you to pay off the balance?

 

1. How much interest will you end up paying?

 

1. Describe steps that you can take to become better at managing your finances.

 

 

Kentucky High School Financial Planning Program

http://www.ca.uky.edu/fcs/hsfp

The purpose of the HSFPP financial updates, video lessons, and Web site is to assist county Extension agents, credit union educators, high school teachers, and parents who home school their teenagers so that they may improve the economic well-being of our teenagers; and also to show educators how the HSFPP, updates, and video lessons meet Kentucky core concepts. The Web site, updates, and video lessons are provided by the University of Kentucky Cooperative Extension Service, and are free to all educators. The list of core concepts and order form for free program materials including the student guide and instructors manual can be found on the Kentucky HSFPP home page.

If you are not already on our listserv:

The video lessons are available only to members of our listserv and will not be posted to the HSFPP Web site because of the timeliness of the information. If you would like to receive our video lessons, which are sent to our listserv biweekly, on alternate weeks from these updates, please sign up at the following page of our Web site: http://www.ca.uky.edu/fcs/HSFP/response.htm

The use of any trade names or products does in no way constitute a recommendation for this product.