So you're out on your own, finally free from the high school grind and possibly out of your parents' home. This stage in life is one of growth. You can stretch your legs, have some experiences and make some mistakes. Congratulations and welcome to adulting!
Picture this, you go to a football game for your favorite team. In the parking lot of a local restaurant there's tailgating; people are painting faces and giving away food. There’s a tent giving away giant foam fingers and you want one to take into the game. “We’d love to give you a foam finger, just fill out this credit card application and we will gladly give you one. If you all sign up, we’ll throw in t-shirts.” You all do, so now you have sweet foam fingers, awesome t-shirts and painted faces. According to Jessica Dinkler of CNBC, that foam finger just cost you at least five thousand dollars! They cite the average student credit card debt as five thousand dollars, with 10 percent of students leaving college with over ten thousand dollars of credit card debt.
It's not all just irresponsibility and fun that leads to credit card debt. Another factor that students face is the load of responsibility that is suddenly imparted on them. You are suddenly paying for your own gas, possibly your own food, entertainment and other incidentals not covered by student loans. You may be taking a full class load and working a part time job. You’ll need money for gas to go to work to make money to pay your credit card bills. You may need money to buy clothes to go to work. This is a predictable cycle that the foam finger pushers are literally banking on.
While no one sets out to get burdened with heavy credit card debt, thinking “it won't happen to me” is a mistake the credit lenders profit from. Thebalance.com points out a few of the top reasons. First, the credit card companies have a good reason to believe your parents will initially help get their children out of credit card trouble. Secondly, they want to get in early in your credit card journey.
Your credit card journey starts early and will play a role in several aspects of your adult life. Smaller lenders such as store credit cards and direct lines of credit from retailers will adjust your interest rate based on your credit score and your debt to income ratio. Larger purchases such as automobile purchases and home purchases will have adjusted interest rates based on your credit score and your debt to income ratios. Interest rates can mean the difference between being able to afford a home and car or taking the bus. If you're using credit cards to make a majority of your purchases, there is a real possibility that a down payment on a car may be a difficult hurdle.
A comparison of a loan with differing interest rates can show how this affects the affordability of a vehicle. Value Penguin states those with a credit score below 550 will pay interest around 15 percent on car loan and may require upwards of a 10% down payment. If your credit score is above 650, you may have the option to finance 100% of the loan at 3% percent interest. To demonstrate what this means, the chart below shows the payment schedule of a 20-thousand-dollar car loan with the best and worst interest rate.
This $150.00 difference in car payment is not because the car is better or newer, it’s the same twenty thousand dollars. The home mortgage interest is a similar disparity on a larger scale. This potentially creates a snowball effect of having less discretionary income and creating more credit card debt that becomes increasingly difficult to pay off.
There is good news. There are companies with free advice on how to get out of credit card debt. Forbes.com shares commonly agreed on approaches.
- -Pay off cards with the highest interest rates. Paying minimums on these cards pays down the principle very little, resulting in the debt not decreasing appreciably.
- -Pay off cards with the lowest balance. This frees up real money to apply towards other balances. Removing these cards with balance will increase your credit score.
- -Transfer balances to a new/different card. Many credit companies will offer 0% interest on balance transfers to get your business.
- -Debt consolidation loans. These typically require credit counseling and are reflected on your credit report as a personal loan
Credit is necessary in today's society. Cash is being used less and less frequently and comes with an abundance of pros and cons. The responsibility of an individual's credit score is on the individual using the credit. Understanding fees, rewards, and limits is part of successfully managing your debt and being successful with credit cards. Formal credit card education is not widely available or required before obtaining your first card. When it is, it’s often from a credit lender who may have a conflict of interest. The three major credit reporting bureaus (Equifax, Experian and TransUnion) offer useful advice, counseling and articles on credit management.
