To Charge or Not to Charge: Should Credit Card Spending be Restricted for Young Adults?
October 8, 2009 by Francesca Antonacci · 7 Comments
As soon as I was 18, I couldn’t wait to do two things: buy a lottery ticket and get my own credit card. I lost my first $10 and gave up on the former, but I didn’t even have to try to get the latter. I got a phone call merely a few weeks after my birthday with a survey from a credit card company — they wanted to issue me my own card. Ten minutes on the phone and one week later, I had that little piece of plastic magic in my hand — and a whole new mess of troubles.
With six months of 0% APR and an increasing spending limit, I went on a charging rampage for four months and then struggled my last two to pay it off. After that, I just signed up for another one. And the vicious cycle continued until I ended up with five different credit cards and a balance on each. Now, four credit cards lighter and (almost) debt-free, I’m just glad I didn’t ruin my credit score because I paid my bills on time. I’m certainly never digging myself into that hole again. But, could my spending problems have been prevented? The government thinks so.
In February, a federal law will be passed requiring all those under 21 to have either a parent co-sign or require teens to prove they can prepay their debt.
Like most good things in life, credit cards can do us good or bad. So will the limitation help or hinder? According to Ken Lin of Credit Karma, this limitation could just keep young adults from building credit. Credit Karma helps you calculate and track your credit score in order to gain access to exclusive offers from companies that “value your creditworthiness.” In order to calculate credit score, payment history and the length of access are considered. By pushing the age required to get an unlimited card to 21, the process is just getting delayed “limiting the data available to build a good or excellent credit score” and even keeping some from getting auto or mortgage loans, according to Lin.
Avi Karnani, the founder of Thrive, a company directed to helping adults in their 20s and 30s learn to control and manage their finances, finds credit cards a pathway to disaster. According to Karnani, young adults who are not educated in financial responsibility can easily destroy their credit and lead themselves to years of debt payment. But with the average college student graduating with $3,100 in credit card debt according to Credit Karma, “there’s no point in building credit and then trashing it,” Karnani said.
So instead of handing an 18-year-old a card that allows him to spend money he might not have and lead him into whirlpool of debt, why not teach him how to use credit responsibly. Karnani compares it to getting a driver’s license. There are learner’s permits that allow driving with limitations. Then, there’s driver’s education and tests that one must pass before he’s given full license over the vehicle. That’s “exactly what we’re doing here with credit,” Karnani said.
Is involving a parent’s signature and putting his/her credit on the line a good idea? It can work both ways. It can seem like just another restriction on the freedoms of young people. First, no drinking. Now, no credit cards. It can also work against the co-signing parent. “When co-signing for a child, the parent becomes liable,” Lin said. So, if a child misses or defaults on a payment, it reflects negatively on the parent’s credit score.
On the other hand, the co-signing parent could use it as an opportunity to get involved with their child’s spending and teach them how to use credit responsibly. “Parents need to sit down with their child and discuss the importance of good credit and the ramification of ruining [it] while you are young,” Lin said.
The other option is a prepaid credit card. This is a good choice for those who have a tendency to splurge or trouble remembering to pay bills on time. However, activity of prepaid cards isn’t reported to the credit bureaus so no credit history is built, Lin said.
But no credit has to be better than bad credit. “We’re looking at 20 years of tragedy brought on by credit, and we’re making some rules,” Karnani said. “People will be better off for it.”
Although Lin disagrees with the idea of delaying the building of credit history for 3 more years, he agrees that “having a safety net in the form of a parent for the first few years is a good idea.” As are spending limits. A “good” limit, according to Lin, is one that can be paid back within 3-6 months based on income, not exceeding 30% of annual income.
Lin also suggests that a credit class for students who do not have co-signers is something for future credit card legislation to consider.
As it seems, credit card overspending for young adults will hopefully come to an end. And it will leave college students considering: to charge, or not to charge? That is the question.
Photo credit: DartVader
4 Tactics for Sticking to a Debt Repay Plan
August 3, 2009 by Lauren Fairbanks · Leave a Comment
Some people will tell you that consolidation companies are just sharks waiting to take advantage of your financial situation and charge you to pay off your own debt. While I’m sure some companies are likely out to price gouge their customers, choosing a good consolidation company (or negotiating a debt repay plan on your own) can be a huge boon to your financial life — it helped me pay off $15,000 in student loans and credit card debt within two years. There is one caveat, however; you absolutely must not miss a monthly payment.
The consequences of missing a payment once you’ve set up any sort of payment plan, consolidation or no consolidation, are many and far outweigh the benefits of using such a program. Unfortunately, for many young adults with a part-time job or a job that works off of tips, these plans can be tricky, given that your monthly income likely fluctuates. But working with a company that is willing to negotiate a debt repayment plan can help you lower your monthly payments and save a ton of money in interest in the long run. So, how do you make sure you stay on the track to total debt freedom? You set yourself up for success by making your payment plan as sticky as possible. This is how:
1. Automate Payments
Have your payment set up with your bank so that it goes through the day after you get paid. Doing this will make sure that you never even see that money and you’ll get used to living off the remainder of your paycheck. An additional bonus? You’ll likely forget you’re even making payments, and when you check your balance on an afterthought, you’ll be pleasantly surprised at how quickly it’s decreasing.
2. Stop Card Activity
If you’re on a repayment plan, there’s a good chance that you’ve probably maxed out your spending limit. But if you haven’t, lock your card in a safe place, and make sure you don’t carry it out with you to deter adding to your spending limit and continuing the vicious cycle of accruing more charges on top of your current balance.
3. Set up a Depreciation Calendar
One of the best ways to keep yourself motivated to pay off a high balance is to watch your balance whittle away as you make steady payments. Printing out a calendar with the dates of your automated payments is an excellent way to visualize the balance getting smaller. On the date of each scheduled payment, pen in the new balance. This will provide a visual aid of your declining debt, and will keep the motivation high to continue snowballing the balance.
4. Check in with Creditors Regularly
Setting up a recurring date to speak with a consolidation counselor or a debt repayment plan agent will help hold you accountable for your payments. Speaking with a counselor on the last day of every month is a great way to review your progress and goals with someone in an position of authority, making it more difficult to miss a payment since you’ll have to answer to a real live human being down the road — not just some automaton spitting out a quick warning.
How To Spend That Holiday Bonus – Responsibly.
December 31, 2008 by Lauren Fairbanks · Leave a Comment
If you were lucky enough to have a job this holiday season, and even luckier to get a holiday bonus from the boss, then pat yourself on the back. Since funds are few and far between these days, that holiday bonus is even more precious. And precious things should be spent well — or shall we say invested well. We know it’s hard to not spend that cash, but hold out for another week or so when most of the shopping mania calms and the urge to spend dies down. And in the spirit of saving cash and building wealth, we’ve thrown together a few ideas on where to go and what to do to get the most out of your bonus this year.
1. Open or Fund a Roth IRA
If you haven’t opened one yet, this is your year! It’s never too early to start planning for your retirement. And if you think that your company pension is going to offer you a warm retirement, chew on this for a minute: a 25 year old currently making an annual salary of $40,000 a year would need to save approximately $600,000 by the age of 65 to effectively battle inflation and live on 75% of their ending salary (assuming they received living wage raises each year). Keep in mind that the majority of pension payment lump sums are in the $100,000 range, meaning that most people only save that much throughout their entire career, and social security payments are barely a drop in the bucket. Never underestimate the crippling power of inflation and economic instability. Supplement your future income by chucking away even a hundred dollars a month into a Roth IRA, and your future self will thank you.
2. Open a Vanguard Stock Account
I will be the first person to tell you that now is the time to Buy, Buy, Buy! Stocks are cheap, the market will rise again, and the people who take advantage of opportunities now will be in better financial shape ten years down the road because of it. Don’t believe me? Follow Warren Buffet’s lead. He’s been buying up stocks like they’re on the 50% off aisle at Wal-Mart. I’ve been putting more money into my stock account, and am planning to invest in another fund this year. And since I’m a big Vanguard fan, here are my three favorite funds managed by them: 500 Index Fund, Extended Market Index Fund, and the Total International Stock Index.
3. Debt Repay
Nothing says “Hello 2009″ like a clean financial slate. Throwing a lump sum at a mountain of student loan debt can be a big motivator to getting that balance paid off. Plus, knocking down a balance can drastically reduce your monthly payments, although I prefer the snowballing method rather than lowering your minimum payments to hasten the repayment process. There are few feelings that trump being free of debt, and the extra disposable income you’ll see each month after finishing off that last bill will feel like sweet victory.
4. Invest in Yourself with a Networking Vacation
I’ve decided to sock away some cash to go towards Networking Vacations. This is not your typical vacation, but attending industry conventions and networking events to further promote my freelance career. After a quick Google search for industry networking events across the country, I realized that there is a convention for absolutely everything. So far for 2009, I’ve planned three small trips and I’m treating them as personal investments in my budget. To save funds, I’ve set up a recurring savings transfer to a high yield checking account with a savings goal (this means once I reach my target amount, the money transfers will automatically stop). And since I’m planning pretty early (almost a year in advance for two of them), I’ll be able to get super cheap airline flights and good hotel rates.
I’m Debt Free!
November 7, 2008 by Lauren Fairbanks · 5 Comments
Photo by Andy Newson
I’m not one to toot my own horn, but I will today because, frankly, I deserve it. Today I became a card-carrying member of the Debt-Free club. This beautiful day follows an intense two year period of handing over half of my salary towards debt repay, and I am tickled pink to have finally gotten to the point where I don’t have to throw away my paycheck on crap that I purchased eight years ago. Read more
