The Pitfalls of
Credit Card Abuse by Charanne M.
Parks
Credit cards. It is nearly impossible to function in
today�s society without one. From making airline, car or hotel
reservations to making purchases on the Internet, it has
become essential for everyday living. And credit card
companies are trying to make it easier to get one.
Competition for credit card customers has become
extremely intense. Companies are looking for whatever
customers they can get, wherever they can get them. Frequently
this brings credit card marketers to campus, where each year
there is a guaranteed new crop of potential customers. By
signing up more customers earlier, the card companies hope to
establish a type of brand loyalty that will carry far into the
future. In the next few months, students everywhere will be
offered free T-shirts, water bottles, long distance, pizza
discounts, Frisbees, backpacks, hats, pens�you name it�all in
the name of marketing credit cards. However, many students
receive credit cards with no idea of the impact that misuse
can have on their future.
In March 1999, the United States House of
Representatives introduced H.R.900, the Consumer Credit Card
Protection Amendments of 1999. Section 7 of this bill
addresses the issuance of credit cards to underage consumers.
One of the goals is to prevent credit cards from being issued
to a consumer under age 21 without proof of independent income
to repay the debt or the signature of a parent or guardian,
similar to a co-signer on a loan. As it stands now, many
credit cards are issued to students with no proof of income.
In general, all students need to do is provide proof that they
are full-time students and they will receive credit
cards.
A student can get a card on his or her way between
classes. Need a VISA card? They will sign you up in the
student center. Want a MasterCard? You can pick one up on your
way to chemistry. But, do you ever consider how this easy
credit is going to get paid and the potential negative impact
on your financial future? Not usually. You may even say to
yourself that you will pay the bill as soon as it comes in.
When it arrives, it lists the total amount you owe and you see
the box that shows "minimum payment of $20." So, you send in
that minimum monthly payment�for every card you have managed
to obtain in the last three years, and figure as long as you
are making the minimum payment, you are doing okay.
However, according to bankrate.com, if you have a
$1,000 balance on a credit card with 18 percent interest, and
you merely pay the minimum balance every month, it could take
you over 12 years to pay off this debt. And did you rack up
that $1,000 debt buying books or emergency car repairs or
trips home? Or was it the latest CDs and the last-minute
Spring Break getaway? Think about it the next time you are
tempted: do you really want to spend the next 12 years paying
for a $15 CD? According to a 1999 study by the Consumer
Federation of America, expanding credit card debt is quickly
becoming one of the most severe threats to academic success on
college campuses. This study, conducted by sociologist Dr.
Robert Manning, a visiting professor at Georgetown University,
suggests that credit card marketing "on college campuses poses
a greater threat than alcohol or sexually transmitted
diseases." If you have already racked up substantial credit
card debt, you are not alone. Dr. Manning�s study estimates
that nearly 20 percent of students may have credit card debt
in excess of $10,000. He goes on to indicate that many of the
actual numbers are difficult to obtain due to refinancing and
debt consolidation loans. Which brings up another issue�that
of using student loans to pay for credit card debt.
Student loans are financing for you to pay college
expenses today based on your ability to pay tomorrow. Credit
is extended to you without proof of income, so you can obtain
the knowledge and skills you need to increase your lifetime
earning potential. This credit�which is designed to help you
prepare for your future�may take you up to 30 years to repay.
When you think about the fact that you will generally graduate
from college with well over $10,000 in student loan debt
alone, you might want to reconsider running up your credit
card for that �must have� item at the mall. College students
and administrators have weighed in on the effect of aggressive
card marketing on campus. In many instances, it has led to
depression and students leaving school. Of the students I
spoke with, many of them were responsible for paying their own
bills, and others had their parents to pay off their bills.
Some students used their cards only for emergencies, or for
things they wanted, and were able to pay off their bills
easily. And then, there were the students who used the cards
for survival, due to a lost job, or family situation and just
got in over their heads.
Malik*, a recent graduate, indicated he got into
trouble as a sophomore, and is still paying for it. He only
had to prove he was a full-time student and the next thing he
knew, there were credit cards in his mailbox. He received
these cards and limits: VISA at $500, Sears at $900,
JCPenney�s at $500 and Discover at $1,000. That is nearly
$3,000 in credit for someone without a substantive job or any
visible means of support! What�s wrong with this picture? At
first, he used them mostly for emergencies and family things.
But, then it became tempting to use them for items he or his
girlfriend wanted like CDs, clothes, and Spring Break. He was
fine paying the minimum monthly bill until a problem arose and
his money got tight. Then he looked up and was several
thousand dollars in debt. And, creditors were calling all the
time. He was already working two jobs, so he did what he could
to pay what he could. But, he feels that due to the interest
that accrued, he just never recovered from those first missed
payments. After graduation, he was fortunate to get a
good-paying job, but then his car broke down. He needed to buy
a new one, but was unable to because his credit was damaged
from his college spending habits. This put him in the terrible
position of having to ask his parents to co-sign on a car
loan. Included in the advice he gives to students, is learn
how to handle your money. "Credit cards are an evil necessity
of today�s society. It is hard to get by without one, but when
you get it, be careful how you use it. The plastic is easier
to spend than cash because you don�t really see it leave your
pocket. It�s very deceptive in the fact that hundreds of
dollars can be charged, yet a small monthly fee is required
and you can�t get out of it at all�credit cards are dangerous
when used without experience."
Terry* got her first card as a freshman at 17 or 18.
She was �cold-called� because she was �fresh meat� and fell
for the company�s
�just-because-you-have-it-doesn�t-mean-you-have-to-use-it"
line. She used it for small purchases and was on top of things
until she ran into difficulty one summer and had to use it to
buy food and pay rent until she could get a job. As for
getting another credit card, she would not even get one if she
had the resources to pay on time and in full.
Andy Jacob is president of
Worldwide Financial Services in Southfield, Michigan, where he
sees a lot of people with current and past credit problems.
His company, founded in 1990, specializes in helping people
with credit problems by providing them with second chances to
have a financial life. "Credit cards are so easily accessible
these days. Credit card companies are making cards available
much earlier than even five years ago," said Jacob.
John* used to be one of those
credit card marketers who would cold-call you over the phone.
He marketed cards for several major companies and was amazed
by the fact that people he did not know would actually get a
card �just like that� over the phone without ever meeting him.
He could sell eight to 10 cards per hour by cold-calling
alone. These consumers rarely asked for any type of
documentation before agreeing to the credit terms.
Now, what if you are experiencing
a �credit meltdown�? First, don�t panic. Second, create a
budget with a realistic picture of how much you really owe and
to whom. Set up your own payment plan with a goal. For
example, if you owe $500 to VISA, promise yourself to pay a
minimum of $50 per month until you get it paid off and only
use it for emergencies. You should also be proactive and call
your creditors before they start calling you. Let them know
you are having difficulty making payments and can only afford
to pay a certain amount per month. Then do it. They may not
like receiving less than what they ask for, but it is better
than avoiding your payment obligations altogether.
Here are some basic tips to help
you manage your money and credit:
1. Use cash to pay for as many
things as possible. Carry a set amount with you and do not
exceed that.
2. Only have one major credit
card.
3. Reserve your credit card use
for emergencies. Car repairs are an emergency. New party
clothes are not!
4. Review your statement each
month and match it up with your receipts.
5. If you must travel abroad,
get a card that you can use in case of emergency. The fee is
worth it, especially if you need medical care or other
assistance. Many companies have special services for members
who travel abroad.
6. Remember: Credit cards are
not for the weak of will or the low of funds. If you don�t
have the money, don�t spend the money!
The major credit card
issuers�VISA, American Express and MasterCard� have created
special �student friendly� locations on their Web sites
designed to help you determine the type of card you should
get, how to budget, and how to stay financially sane. If you
are considering getting a card, or would like more information
about your present card, you may want to check out these
sites. Be sure to read the fine print! If you are already
being hounded for repayment by creditors, check out what
confidential student crisis services are available on your
campus, or contact a local credit counseling service to help
you out. For a fee, the credit counseling services will allow
you to write one check to them each month, and they will
negotiate with and pay your creditors from that amount. In
many instances, creditors will accept a lower payment amount,
if they know you are getting help for your situation.
Occasionally, they may defer your interest payments so that
your balance will not increase. Whatever you do, take care of
your credit, and it will be there when you really need it.
*All names have been changed to
preserve confidentiality.
Charanne M. Parks is
a financial management consultant and contributing
writer.
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