Tuesday, August 7, 2012

Financial Education

Imagine this... you are 18 and in the registration line for college. There is a sign up table for a credit card with a guaranteed approval of a $500.00 credit limit. They are even going to give you a Frisbee and a backpack (w/ their logo of course), at no additional charge.
Well, this is a deal; you don't have a credit card anyway. You are in college now, so of course you NEED one. Your parents have always been against them and have taught you to avoid credit card debt, so you figure you can handle it... after all, it's only a $500.00 limit.
Time passes, you charge and pay it off, and this process repeats. You are building a credit rating you tell yourself. Then one day in the mail a letter comes from the credit card company. CONGRATULATIONS! You have been awarded an increase of your credit limit... up to $2000.00. It appears that your ability to manage your credit has paid off.
This pattern continues and you are now a 22 year old senior in college. Another letter comes in the mail and it says that your credit limit is now up to $20,000.00, and that $10,000.00 can be used as a "cash advance". Better yet, there are NO FEES for 1 year on cash advances, and that they have included 3 cash advance "convenience checks"... in case you have an emergency. Another nice perk is that there are no payments or interest for 3 months.
You think to yourself... "This couldn't have come at a better time", because you are between jobs so money is tight, and your car transmission is slipping regularly... a loud knocking sound as you accelerate from a stop sign. Come to think of it, the power window on the driver side won't go up well, and there is a noisy exhaust leak. Oh, you need new tires too... and a tune up for that matter.
You decide to have everything on the car fixed by using the cash advance check, and you even paid off the last $3500.00 that you owed on the car. You convinced yourself that this would be alright and you could lower your insurance if the car was paid off.
You smile to yourself as you walk through the mall. You are proud that you are coming up with such a great plan. Money has always been tight, you are not one to use your credit card, but they are having great sales this time of year, and there is no interest on the credit card. "Why not"... you deserve it. $1000.00 dollars later you are sick to your stomach about the spending, but you did need some new cloths.
Your phone rings and it's the mechanic. He gives you the bad news. The transmission is only half the problem. The knocking sound was more than you expected. You need new CV joints, shocks, and the rear brake drums are bad too. Fine... fix everything you tell them. Well, it's going to be tight, but that will max out the cash advance. You were running with a few thousand dollar balance anyway, so now you are getting concerned.
Six months later, and to your surprise, you still do not have a steady job. You ended up putting your tuition and books on the card too at this point. They offered no special deal for that one... just a regular 18.7%. At this point you have too many student loans and you just want to get it done. It occurs to you that it is so much easier to pull that card out, than it ever was in previous years.
You look out the window a few weeks later. The mail carrier pulls away from your mail box out by the curb. As you walk back to the apartment, you are opening the envelope from the credit card company. Your stomach drops as fast as your jaw... 29.6% interest! What happened! There is also a $29 over limit fee, as well as a $29 fee for not making your payment on time. "Holy Cow"... I missed my payment? I must have forgotten.
Ladies and gentlemen this is a sad story of how the scenario plays out all over the world... ridiculously high fees and interest rates that go through the roof, when you hit a rough spot in life. Unfortunately, that is what they expect to happen eventually, and they are there to collect their fee's when you are eventually down on your luck. Multiply this by every college kid, young adult, young couple, as well as everyone else on the planet. You do the math. It means your money, in their pockets. And it is in their best interest, and their shareholders, to go after this business.
Look at it from the perspective of the credit issuer. If they can bait college kids, and get them into a scenario where they have a credit card, and then keep raising the limit, human nature says that in a pinch, we will take the bait, all of it. The statistics support this point of view, look at your family and friends, most of them will have a large balance and no plan for eliminating the debt.
There are many who believe that the consumer debt industry is too predatory, and from my point of view, it is hard to disagree with their evidence. Give serious consideration to avoiding consumer debt like the plague. The perceived value of "having it now" will cost much more than you realize. One missed payment, regardless of the reason, can start you down a path from which you can not easily return.