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HSFPP Update # 182—Pitfalls of Credit Cards... and Alternatives

Message from Flashman: Consumers are bombarded with advertisements saying that, if you want to be happy, competitive, and “in the game,” so to speak, you need this or that product (a new car!, the latest handbag!, organic air freshener!); and, if you don’t have the cash on hand now, just put it on your credit card. Of course, there is nothing wrong with using a credit card as long as you have the money to pay the bill. The problem is that far too many people no longer ask themselves whether they really need something or how the purchase will affect their budget and their saving and investment goals. We, as educators, have an uphill battle to compete with advertisers, banks, and other lenders who have the funds, the public relations firms, and the lobbyists to get their message out.

James Scurlock’s new book, Maxed Out: Hard Times, Easy Credit and the Era of Predatory Lenders, pays special attention to the ways in which lenders specifically target young people and it demonstrates with alarming clarity the damage done when teens and college students develop what Harvard law professor Liz Warren calls “a taste for credit”. The umbrella group Americans for Fairness in Lending (AFFIL) is organizing a public awareness campaign and is using both the book and Scurlock’s feature-length documentary film of the same name to bring these issues to the front of the nation’s agenda. The book has been called “the Fast Food Nation of debt”. It’s wry, funny, and biting at times and contains photos and humorous footnotes that should draw in the general (and young) reader. Hopefully, Scurlock’s efforts will make our job a little easier and help teens understand the consequences of not thinking before they buy. Only by getting teens to think about saving and investing, rather than spending, can we help them reach their short- and long-term financial goals.

We will discuss the book and movie at greater length in next week’s video lesson. Those of you who read the updates from our Web site but are not on the listserv might want to sign up now, as we began last week sending a biweekly video lesson for the weeks that we do not send an update. This will allow us to include Web links to news stories on video that we hope will engage students in a new way and allow us to meet KERA’s objective for incorporating technology in the classroom. Our video lessons will be sent to those on our listserv only and will not appear on our Web site; so, if you want to receive these lessons, sign up at http://www.ca.uky.edu/fcs/HSFP/response.htm.

 

Web Site Pick of the Week:

http://www.bankrate.com

Bankrate.com compiles and presents financial rates and information in an objective manner, providing up-to-date rates and information on auto loans, credit cards, and other banking products. The site is full of helpful features, making it a great place to compare and contrast financial rates.

 

In the New$... Pitfalls of Credit Cards... and Alternatives

by Erin Burch, freshman finance major at the University of Kentucky

As a student myself, there have been times when cash has run low and the thought of using a credit card to buy new clothes or the Chinese food I had been craving seemed very smart. But, after hearing credit card horror stories from friends and family, I have been too cautious to actually sign up for one. I decided this week to focus on the pitfalls of having a credit card as a young person, as well as the advantages of using one the right way. Offers are everywhere, in magazines, online ads, and in the college newspaper. Many teens view it as a way to get what they want when they do not have the cash, or don’t have the money in their checking account, but believe somehow they will have the money when the credit card arrives in the mail. This is the point at which credit cards can change your life for the worse.

According to a 2003 article in the Kansas State Collegian (available on the Young Money Web site), Nellie Mae found that 83% of undergraduates in the U.S. have at least one credit card, up a whopping 24% since 1998. According to the Washington Post, “Three out of five students with credit cards maxed them out during their freshman year.” It is understandable that freshman students are trying out credit cards. It is our first year in college, we’re beginning to feel like adults, and having a credit card seems to bring this closer to reality. But, having a credit card isn’t the problem; misusing credit is.
 
Paula Fleming, vice president of communications and marketing of the Better Business Bureau in Eastern Massachusetts, Maine, and Vermont, said “College students often have little disposable income but are surrounded by the temptation to obtain credit cards and spend money they do not have” (Sallie Mae, 10/24/06). In talking with girls at my sorority, I found that 80% of them got a credit card to have what they viewed as “extra money.” But these students don’t realize that this money will need to be paid off; and not paying it off could put them further into debt and ruin their credit. Also, if you don’t look into the credit card you sign up for, you could be surprised when the teaser rate of 9% becomes 22% the first time you forget to make a monthly payment. Wouldn’t you like to make 22% interest loaning money to your bank instead of the 4% or 5% you make on your saving account? As The Better Business Bureau recommends, “Take your time when considering a card, compare rates, benefits, and fees, and don’t let a prize at a campus kiosk tempt you into opening a credit account.” Though credit cards could hurt you if you use them unwisely, they can help if used well.

Robert D. Manning, author of Credit Card Nation: The Consequences of America’s Addiction to Credit, says that putting a phone, utility, or retail account in a student’s name instead of a parent’s can help build credit (Washington Post). If you are going to pay these bills off using a credit card, make sure you can pay it all off each month because it will be in your name and could hurt you as well. Since I don’t have a steady paycheck right now and don’t know if I could pay off the card each month, I think it’s smarter for me to wait to get a card. Some of you might find it just as well to wait, also.

Though many parents think it is important to establish credit early, Jan L. Davis, president of TrueLink, estimates that you can establish good credit in “about six months.” Getting a retail charge card is one way to do this (Washington Post).  I would rather wait to get a credit card, knowing that I will be able to pay it off and therefore establish my credit on a good level, than get one now. Davis also says “Don’t charge to the limit. In fact, just charge about 35 percent of the maximum available credit line. For example, if your credit limit is $1,000, don't charge more than $350.”

There are other steps you can take to make sure you don’t hurt your credit score before even getting a credit card. One option is to apply for a secured debit card, which is backed by the money in your savings account. For me, knowing that the money I spend comes from my own hard work leads me to spend less on things I want, and spend mostly on necessities. My goal is to not to use a credit card in college, but I might get one eventually just in case of a financial emergency. Not having outstanding debt when I graduate college will help me in the future, when I’ll need to borrow money for a condominium or graduate school. This is one of the reasons I applied to work with this program, in order to have extra cash for items I want, but don’t want to go in debt to buy.

Sources: (1) “Excessive Credit Card Use Causes Student Debt Woes,” by Jamie Barrett, Kansas State Collegian (Kansas State University), 2003. In: http://www.youngmoney.com/credit_debt/get_out_of_debt/021007_03

(2) “Do College Students Need Credit Cards? Hardly.” By Michelle Singletary, Washington Post, 8/28/03. http://www.washingtonpost.com/ac2/wp-dyn/A56633-2003Aug27

(3) “Campaign Launched to Educate Students and Families about Responsible Debt Management,” Sallie Mae, 10/24/06.  http://www.salliemae.com/about/news_info/newsreleases/102406.htm

 

Discussion Questions:

1.) Do you have a credit card? If so, what do you use it for? If not, are you considering one?

 

2.) What is one way a credit card could hurt your credit?

 

3.) Why do you think so many young people get suckered into having a credit card when they are in high school or college?

 

4.) What are some ways that you can use a credit card responsibly? 

 

Follow-Up Activity:

Go to http://www.creditcards.com/ to research the various credit card carriers. Which has the best interest rate? Are there rewards for picking a specific one? Which one do you think would be best for a teenager?

 

Kentucky High School Financial Planning Program

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

The purpose of the HSFPP weekly financial updates 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 and the weekly updates meet Kentucky core concepts. The Web site and weekly updates 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.