Our oldest daughter recently graduated from college (1 down – 3 remaining). She headed to West for an internship that will help her get some certifications she needs. During her college years, our mailbox was filled with student loan companies making sure she knew they were there for her, to lend her what she needed to complete her degree. Now that she has her title, our mailbox is full of offers from credit card companies offering her the credit she “needs” to get her life going.
I’ve been shredding the deals as fast as they come in the house. And I have shared with her the trap that these companies are setting for her and her contemporaries. Last week, instead of shredding the deals, I let them pile up in a heap on my desk. We opened them up and the first few sentences of each letter were quite revealing.
“You worked hard to achieve your title and that hard work earned you our respect…”
“Congratulations on earning your college degree. As you begin your professional life, you may need to rely on credit to get you started…”
“Great job. Let us reward you with a great opportunity to help you build your credit rating…”
This is the normal way this ends for our young adults. As the offers roll in, the recent graduate accepts a few of them, feeling great that his hard work has been recognized and with the lofty goal of having the cards in case of an emergency. Card companies may all have credit limits in the $1500 to $2000 range, but the reality is that once the applications are submitted, unless the graduate has already made excellent profits, most of the time they will be granted a smaller limit, in the range of $500.
Once they have the cards, the temptation to use them becomes almost impossible to overcome. Maybe it’s an item of clothing, or a night out with friends, or even buying a gift for a loved one. The intention, as we all know, is always the same. “I’ll use the card to buy this…and pay the balance when the bill comes.” Then when the bill comes and the minimum payment is only $25, most will pay the minimum because they have other cash flow needs that seem more important at the time. And this cycle repeats itself month after month.
Credit companies will begin offering credit limit increases over time. As they see payments being made on time, that small $500 limit moves to $750, then $1000, then $1500. Fast forward the clock 5 years and these young adults may find themselves in credit card debt. of credit over $20,000, paying minimum payments of $500 per month, and not really making a dent in principal balances. It is a cycle of financial paralysis.
My suggestion to you is that you share this with any young adults in your circles. Make sure they know what is at stake and why these companies are doing everything they can to get them into a revolving credit nightmare. Explain to these young adults the concept of “delayed gratification” – instead of what credit companies offer – “instant gratification”.
Credit is important, there is no discussion there. But proper credit utilization and understanding the pitfalls are just as (if not more) important. Spread the word.