To Charge or Not to Charge: Should Credit Card Spending be Restricted for Young Adults?
October 8, 2009 by Francesca Antonacci · 7 Comments
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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
The Perks of Keeping a Coin Jar (or How I Made $20 in 5 Minutes)
September 3, 2009 by Jeffrey L. Wilson · 2 Comments
Financial advisers wisely push the idea of keeping a few months worth of money in savings as one never known when an unfortunate event may occur that demands a significant sum of money. They tend to overlook, however, the importance of the change cup, which can come in extra handy for times when you need a few extra bucks, fast.
Take Two: Thrive on Behavioral Budgeting and the Future of Financial Management
July 27, 2009 by Lauren Fairbanks · 6 Comments
This is the followup to our interview with Thrive CEO and Founder, Avi Karnani and Lead Scientist, Matt Wallaert. In our first installment, which you can read here, we talked to them about their work in financial literacy, competition with popular money management site, Mint and how they differ from other financial service companies. In this installment, we’ll find out more on behavioral budgeting and how it works, and how Thrive is working to make banking a better service industry. Read more
What Does the Credit Card Reform Mean for You?
May 26, 2009 by Lauren Fairbanks · 1 Comment
As you may be aware, Congress just passed a credit card reform bill that helps protect consumers, such as you and I, from the big bad credit companies. Although this bill has gotten almost unanimous support from law makers, there have been a few who aren’t happy with the new regulations. Read more
A Surefire Way to Spend your Retirement in the Poor House
February 27, 2009 by Lauren Fairbanks · 1 Comment
After speaking to various older coworkers and family members, I’ve come to the realization that it’s not only the younger generations that need a crash course in personal finance — many of the ones closing in on retirement need a refresher course too.
The red flag that signifies this need for a major overhaul of financial planning and education is the fact that people seem genuinely surprised when they’re five years away from retirement and lose 50% of their 401(k)’s because they kept all their holdings in stocks. I think most people would roll their eyes if someone took $100,000 of their savings and gambled it away in a casino, yet we’re shocked and appalled when a 60-year old loses half of their retirement savings because of having a majority of stock holdings. This isn’t bad luck — this is bad planning.
Take for instance my father. At 62 years old, he’s getting close to the day when he’ll be able to kick back, relax, and maybe play a little golf. Or will he? In October, he lost a good chunk of his 401(k) after the stock market plummeted. Although he had amassed a nice pile of retirement cash and had a strong company match, he neglected to check on where his holdings laid — which turned out to be completely in stocks — and lost half of his savings. I love my father dearly — he’s an intelligent man, but that clearly wasn’t the smartest of moves.
Over the past 25 years, companies have become varied and (somewhat) generous with their retirement plans, offering a myriad of pensions and 401(k)’s. And for the most part, I think that’s great. But someone has to be responsible for educating people in what these plans actually do and what risks are inherent in each of them. As a country that emphasizes the importance of wealth building, we are seriously falling short in our ability to educate our citizens on how to prepare themselves for the financial future.
This lack of personal financial knowledge when it comes to the risks and uncertainties of investing, is going to keep hurting uninformed individuals unless we start focusing on financial education. I think we need to start with our high school and college students and not stop until work our way up to Gen Xers and Baby Boomers who haven’t yet clearly mapped out their future finances.
Stock markets do nose dive, like we recently witnessed, and until we start educating the masses about their investments, the people that lack a basic financial know-how will be the ones who come out of it marred and flat broke.
Vanguard on Investing Successfully in Today’s Market
December 30, 2008 by Lauren Fairbanks · Leave a Comment
Vanguard has a cool new video series up on their website right now which talks about how to make the most of your investing ventures. Their reassuring voice couldn’t come at a better time, considering many people’s hesitancy to trust the market right now. Read more
Monthly Mashup: October Edition
October 31, 2008 by Lauren Fairbanks · Leave a Comment
It’s that time of year when the weather turns crisp and the proud citizens of New York bundle up in their winter gear. But before we head off into the mother of all holiday seasons, let’s take a look retrospective look back at some stories from the past month. Here are some of our favorite posts from around the net, as well as our more popular stories from October in this month’s Mashup.
One on One with Credit Karma’s Ken Lin – We spoke to the CEO and founder of Credit Karma, a new internet start-up that allows you to check your credit score whenever you want. We got the 411 on how the site works and where they plan to go from here.
The Under $60 Work Outfit - The Budget Fashionista showcased a great example of budget shopping with her $60 Work Outfit. Find out how you can look fabulous for pennies on the dollar.
5 Well-Paying Careers You’ve (Probably) Never Considered – Now can be a rough time for students looking into future career paths. With layoffs aplenty right now, the usual career paths may not be such an enticing route. Check out these five career paths that are blossoming despite the recession.
8 Fun Recession-Proof Activities – You don’t have to stop your social life because of rising prices and stagnate salaries. There are still ways to entertain yourself at home and around NYC – even when you’re on a shoestring budget. Check out our 8 recession-proof activities for some low-cost NY fun.
Six Benefits of Bill Consolidation – Consolidation doesn’t have to mean defeat. There are many benefits of consolidating bills and we’ll take a look at six of them. Take a look at them and get your finances under control and back on track.
Gotta Travel? Take the Bus! – With air travel sky rocketing (excuse the bad pun), it’s no wonder people are looking for alternate travel means. Check out these four bus companies that are helping NY’ers ease the pain and costs of traveling.
Consumers Feel the Next Crisis: It’s Credit Cards – The New York Times takes a look at the credit card industry, and how the current economic situation is affecting the way they pick and choose lendees.
5 Simple Meals Made with Ramen – You may not be able to afford a fancy dinner, but that doesn’t mean that you have to spend five nights a week rotating between beef and chicken flavored ramen. Take a look at our five fun and easy meal ideas to spice up that ramen.
Switching to Cheap Beauty Products – Drugstore spending can easily spiral out of control — especially for women purchasing makeup and beauty products. Read up on how to trade in those expensive products for budget alternatives.
Work Out for Cheap: Alumni Gym Memberships – Gym memberships are super expensive these days, but staying fit and healthy is still a prime and valid concern for most people. Think you can’t have both? It may be more possible than you think. Check out our list of NYC alumni gym memberships.
Ditch the Bureaus: Check your Credit Score with Credit Karma
October 16, 2008 by Lauren Fairbanks · 2 Comments
Credit Karma
Obtaining credit scores has always been an enormous hassle. You go to Annual Credit Report and request it, then you get it and it shows you the report – but not the score. That’ll be an extra $8. Read more
Quicken Online — Free Personal Finance Manager
October 14, 2008 by Lauren Fairbanks · 1 Comment
Photo by Quicken Online
Quicken — the guys behind some of the most popular finance tools in the home and workplace today — has finally learned from the Internet start-ups what the people want: Free Personal Finance Management. And they’ve launched Quicken Online to feed the starving masses. Read more
Six Benefits of Bill Consolidation
October 10, 2008 by Lauren Fairbanks · Leave a Comment
Many people think bill consolidation is synonymous with financial defeat – happening when you aren’t able to pony up the cash for your monthly credit card statement. But the truth is, bill consolidation can be the catalyst that propels you to really tackle that growing pile of debt. Bill consolidation has been a huge boon to my financial wellbeing, and it can do the same for you. Keep on reading for six reasons why debt consolidation can make a huge difference in your finances.
1. Easier Maintenance of Payments
Trying to keep up with a myriad of bills can be a daunting – even overwhelming – task. You’ve got various due dates that may or may not correspond to your pay schedule. Take all those bills and consolidate, and you have a single bill with a single due date to remember each month. If you’re an auto pay fan, it reduces the hassle of overseeing multiple debits to ensure that you’re not overcharged. Managing one payment: easy. Managing eight: not so much.
2. Lower Interest Rates (more money towards principle)
Ever tried to haggle a better interest rate from a credit card or student loan lender? Not an easy feat. Consolidation companies, however, have a little more pull when it comes to negotiating better interest and fees. Creditors understand that when a consolidation company is involved, it’s a sign that their client is serious about paying off their debt. This gives them a bit of leverage to work out cheaper interest rates from you since they know for certain that they’ll be getting a payment in each month. In return, this lower interest means that more money is going towards paying off the principle (the original debt) which will knock down the debt more quickly.
3. Cheaper Monthly Payments
Since a good chunk of the total bill is cut down once you lower the interest rates, minimum payments go a longer way. For example, I consolidated three years ago and started out with around 15K in debt. My monthly payments were around $500, but Consolidated Credit was able to get one of my credit cards down from a 21% interest rate to an 11% interest rate (as long as I agreed to freeze the account). Multiply these savings by three or four creditors, and you have a significant monthly savings. Once I consolidated, my monthly bill went down to $350.
4. Peace of Mind
Creditors’ phone calls are no fun. If you’re ever been more than 120 days past due on a bill, you know that creditor phone calls can become a daily occurrence. There is nothing like the stress of someone calling multiple times a day asking you for money that you don’t have. Especially if it’s gone to collections and they demand the payment in full. In a relatively short amount of time, consolidating companies can make those call go away.
5. Improved Credit Rating
No one knows exactly what the algorithm is that’s used to determine your credit score, but one thing we do know is that paying off debt increases your debt to credit ratio. Your debt to credit ratio is the amount of money you owe in comparison to the amount of credit you have. Decreasing your debts puts a bigger gap in between what you owe and what the amount of credit you’ve been approved. This makes you more stable looking to credit companies, and in turn, increases your credit score.
6. Support Network
Surprisingly enough, a debt consolidation company can provide a network of support for debt repayment. I found that when I called the consolidation company each month to update them on the status of each bill, they were always really encouraging and mailed out budget advice and tips on a monthly newsletter. A network is crucial to staying on track. There are lots of distractions to keep you from your debt repayment goal, but others in your situation and people who’ve successfully gotten out of debt can provide the right advice at the right time.
