A friend asked me recently to say something to his son, who was leaving home to start his freshman year in college.
He was looking for something inspirational about saving money or spending wisely or investing prudently, and was surprised with my answer, which went something like this:
“Don’t lie to yourself about credit.”
Today’s college students are inundated with credit-card offers, many of which come with cool stuff such as T-shirts, sodas and discount coupons.
To the credit-card industry, students are “newbies,” a polite way of saying “fresh meat.” You can hardly blame a company for pursuing a lush line of future business.
And there is nothing automatically wrong about the use of credit cards, so the offers themselves are not offensive. Heck, credit issuers send millions of card offers to adults each year, and obviously get taken up on enough of those offers to keep the post office extremely busy.
In fact, many experts believe students should accept a credit card offer before graduating from college, just to help establish a credit history. (Note to the students: We’re talking one credit-card offer.)
But if you ask people below the age of 50 about their credit history, many will say they have had a problem at one time or another.
These people are from the generation that has lived off the explosion of the credit business. The problems are self-identified, and only after they have festered awhile.
For one person, a credit problem is a $500 balance; for another it is debt high enough to force bankruptcy.
In almost all cases, however, anyone with a credit problem–large or small–has lied to themselves, or told themselves the four great fibs of the credit-card game to justify their actions. That’s why it is important for spenders–no matter what their age–to be honest with themselves before whipping out the plastic.
Whether you are a student or an adult, these phrases should warn you to rethink your spending decisions.
The four great lies of credit are:
– “I will only spend what I can afford.”
Consumer credit is not cheap. You may be able to avoid annual fees, but you won’t be able to escape interest charges if you carry a balance for any length of time.
Here is the truth: If you could afford the item right now, you would pay cash.
So if you can’t afford, say, a $500 stereo right now, you can be certain you are overspending when you put the unit on credit and the bill grows to $575 over the course of a year.
The longer you hold that debt, the higher the cost goes.
Before you take on a debt, have a plan or a schedule for paying it off. Otherwise, you are almost certain to overspend.
– “I can get a bargain using my card today.”
Dr. Joyce Brothers once noted that buying on credit is “much like being drunk. The buzz happens immediately and gives you a lift. . . . The hangover comes the day after.”
There is always something that is on sale, available for a limited time only or cheaper if purchased in such bulk that you spend more money today.
Nothing is a bargain if you can’t afford to pay for it in the long run. Remember that the cost of carrying those debts quickly eats the savings, so that today’s bargain becomes tomorrow’s credit crunch.
– “I will pay it off on time (or quickly).”
According to RAM Research, which tracks the credit industry, the average American household is carrying $4,200 in debt on just the major credit cards alone. That doesn’t include anything past the Visa, MasterCard or American Express bills.
Presumably, those bills were incurred with the idea that they would be paid off before the interest mounted. But there was another bargain the next day, some other pressing need that had to be addressed or some other desire to be satisfied.
The result is a society with three types of people: the Haves, the Have-nots and the Have-bills-to-pay-for-what-they-have.
The last group tends to dip too regularly into the credit pool. Using Dr. Brothers’ analogy, they may even start binging. Pretty soon, their head hurts every day–or at least on those days when they look at the bills.
A smart credit consumer knows to look at a combination of pricing conditions; it’s not just how much something costs, it’s how long you will need to pay it off.
– “I can make all my payments, so I’m doing OK.”
Making payments is not the same as paying the debt off. Many college students hold cards that can actually have a “negative amortization” long before they learn what those words mean.
Here is an example:
A student gets a credit card with a $1,000 limit and an 18 percent interest rate, and avails himself to the max. Like a lot of student cards, this one has the promotional gimmick of a 1 percent per month minimum payment. That would amount to $10 on the $1,000 debt.
There’s only one problem: Interest is accruing at a rate of more than 1 percent each month, mounting at close to $15 per month. If the student simply pays the minimum, the card’s balance will be more than $1,000 at the end of a year.
It is not just enough to service the debt. To get ahead, you must be paying it off.
Credit often seems like an open spigot, running seemingly without limits. Get close to the edge, and your card issuer may offer more, or someone new will come along.
The truth is that credit is a financial resource, to be used wisely and sparingly. If you use too much of it, one day that money spout will dry up. That’s when the cost of credit goes beyond money terms to lost self-esteem, broken relationships and more.
“People need to be honest about the consequences of using credit,” says Gerri Detweiler, author of “The Ultimate Credit Handbook.”
“Credit cards are pitched as a way to make your life easier and better. They can be, but don’t kid yourself about what you are doing with them. No one realizes how hard it is to get out of a credit problem until they have gotten into one. That’s when all of these credit offers no longer sound so good.”
