High-cost credit

Jim is a senior at a rural high school who was upset that gasoline prices were rising towards $2 a gallon. After listening to a Credit Abuse Resistance Education (CARE) Program presentation and thinking more about the discussion of the true cost of consumer credit at high interest rates, Jim told the class that he thought it was stupid that so many people were charging their gasoline while maintaining substantial balances on their credit cards. In the end, he said, they were probably paying $3 or $4 a gallon without realizing it.

After Mary lost her job, she filed for bankruptcy. She thought bankruptcy would be the solution to her problem of overwhelming credit card debt. One day, she frantically called her trustee to find out how she could undo her bankruptcy. Mary had just interviewed for a good job in the financial department of a local company for which she was well-qualified, but she was turned down when the company learned of her bankruptcy. When the trustee told her that there was nothing she could do, Mary remarked that filing bankruptcy was the biggest mistake she had ever made.

A couple filed a Chapter 13 bankruptcy with more than $80,000 in credit card debt. Anne, the wife, who had been employed as an accountant at a local company for more than 16 years, admitted that she should have known better. But she got “caught up” in overspending and abusing credit just like so many others. Anne didn’t want the monthly payments required in her Chapter 13 to be paid by a wage order served on her employer, because she feared that she might lose her job or any chance at a future promotion.

Once you understand the true cost of consumer credit and its consequences, I hope that you will take the advice of people like Mary and Anne and learn to live within your means and stay away from credit card debt.

In our CARE Program brochure, online at www.careprogram.us, we explain that in 2001, the average family in this country had $7,000 in credit card debt, including store charge card accounts. If they continued to maintain that balance at 20 percent interest over the parent’s work life, they will have paid more than $56,000 in interest from age 25 to 65. That’s $56,000 less to buy and do things, such as helping their kids go to college.

If you do the math for families who carry $15,000 or $20,000 credit card balances, which unfortunately is not unusual, the interest they are paying is frightening.

If you owe $1,000 for purchases on a retail store account and you only pay the minimum payment every month at 21 percent interest, it will take you a minimum of seven and a half years to pay off the balance. In the end, you will have paid at least $2,000 for those $1,000 in purchases.

Anne believed that more than $25,000 of her $80,000 of debt was accumulated interest. Why would you pay $3 or $4 for that gallon of gas, $120 for those $80 running shoes or $150 for those $75 concert tickets?

Think of it this way: If the average family invested the $116 they were paying in interest every month in something with a 5 percent rate of return, it would amount to more than $180,000 when the parents reached age 65. At a likely 7 percent rate of return, they would have earned more than $300,000. Couldn’t you do something better with $56,000 than use it to pay interest on things you purchased years ago that you don’t even have anymore?

This is the true cost of consumer credit at high interest rates. As Jim said, it’s stupid to pay it. Especially in order to buy things that you don’t need or can’t afford.

Paul was one of four finalists for an information technology job that had received more than 200 applications. After reviewing the credit reports of the finalists, even though Paul had been the leading candidate, another finalist was offered the position. Paul’s abuse of consumer credit indicated to his prospective employer that he had not exercised good judgment in handling his financial affairs and that he might not perform well in the job because he would have to deal with his debt problems.

George, who worked hard in undergraduate school (when he wasn’t using his credit cards to shop on the Internet or to enjoy life beyond what he could afford), was accepted into several good law schools. However, he was turned down for the student loan he needed to be able to go to law school because of his substantial credit card debt.

Mitsy, an 18-year-old college freshman, had three maxed-out credit cards. She hung herself in her dorm room. Her checkbook and credit card bills were spread out all over her bed. Her mother said that she did not even know that Mitsy had any credit cards.

You know from everything that you have read and seen in the media recently that a college education is necessary to get many good jobs. But even with an education, a good job or a promotion can be hard to come by. You don’t want your abuse of easy credit to be the reason you lose a good job or a promotion or get turned down for a student loan or for admission to graduate school.

Those are not the only consequences being experienced by young people today. Other consequences may include being turned down for an apartment or a car loan, paying higher car insurance rates and reduced performance at school or work due to the stress and depression that can accompany financial problems. And don’t forget about bankruptcy, which will ruin your credit rating and severely reduce your job prospects, like it did for Mary.

Did you know that the average college student graduates with credit card debt of $2,700 and some with debt of more than $10,000? But there are also many who learn the lessons of financial responsibility and graduate with no debt. Which kind of graduate will you be?

As you prepare to go off to college, work out a realistic budget with your parents so that you can live within your means and avoid unnecessary credit card debt. Also build some savings for the minor emergencies you are likely to experience. In 2003, I had more than $2,500 in uninsured and unexpected medical and dental expenses. Fortunately, I had savings to use to pay for those expenses. I did not have to resort to consumer credit at high interest rates.

When you go off to college, no one expects you to have that large of an emergency fund. But you don’t want to have to resort to high interest rate consumer debt when you do have an unexpected minor emergency. You should have a reserve for when your winter coat is stolen at a party or you need to purchase books or supplies that you didn’t anticipate.

When you see people using credit cards, ask yourself if they are living within their means. Are they using credit cards responsibly? Can they afford what they are buying or doing? Who will you be like when you can get credit cards?

Please do the following for me:
Sit down with your parents and read about the consequences of consumer credit at www.nextSTEPmagazine.com and www.careprogram.us.

Develop a realistic budget for college. With a budget that you can buy into, you won’t need or be as tempted to incur credit card debt.

Build an emergency fund into your budget.

Remember that living above your means and buying and doing things that you can’t afford and don’t need can become addictive behavior that is hard to break, just as it was for Anne the accountant.

Don’t lose sight of the many consequences that you may face if you do get caught up in credit card debt.

Visit the CARE Program Web site often, even when you are in college, as we continue to update it with new and important information.

Also be sure to pick up The Next Step Magazine next school year for more CARE Program articles.

Judge Ninfo is founder of the CARE Program, based in Rochester, N.Y., which teaches students the fundamentals of finances through live presentations given by bankruptcy judges and attorneys who deal with people with financial problems. Their goal is to show you why you should choose to avoid consumer debt and the many consequences and financial problems that often result if you don’t. E-mail him through www.careprogram.us.

Article provided by

View more articles | Information provided by collegeanduniversity.net