Credit Virgins

credit cards
As hundreds of thousands of fresh-faced, financially-unaware teenagers hit US and UK universities this month, banking staff have doubtless been salivating at the prospect of snaring as many new students as possible, not least because, in many cases, each new signup generates a personal bonus for the staff member involved.

Little wonder then that they will be giddy at the thought of handing out freebies to young credit virgins to entice them to open new bank accounts, to avail themselves of “free” overdraft facilities and to sign up for that all-important credit card… just for emergencies, of course.

For most students, this will be their first time away from home; away from the controlling influence of their parents. It’s a time of adventure, of discovery and of nervously finding your feet in a very wide world.

We All Make Mistakes

As exciting as all that may sound, it is also a time in which to make mistakes. And to a large extent we take that for granted because making mistakes is how we learn, isn’t it? Some of those mistakes will probably involve alcohol. Others will involve hasty relationships with people you later discover you don’t really like. But the longest-lasting relationship and arguably the biggest mistake by far will be the student loan debt you build up during your three short years in the higher education system.

The banks know that of course: why do you think they’re so keen to offer you incentives to open your account with them? They know that once you’re in the debt cycle you’re hooked, so they’re keen to grab you as soon as you arrive, wet behind the ears and full of hope and enthusiasm. Oh, you’ll realise later of course, but by then you’ll already be in debt up to your eyeballs, unable to make more than the minimum payment each month, and that — that inability to clear your debts — is what makes you a regular money-printing machine for the bank: they know you’ll be borrowing money from one pay check to the next just to stay afloat for a long, long time.

But that won’t happen to you, will it?

Of course not. You know better than to get in over your head. And anyway, you’ll have a great job lined up when you graduate so money won’t be an issue… will it?

Okay, let’s leave the main components of the debt trap for another day and concentrate just on credit cards, because they are the crack cocaine of your personal finances and they will bleed you dry quicker than anything: student loans, overdrafts, personal loans… they can all wait for now.

And we’ll save the conversation about the largest claims on your wages for a later date too… the obligations which will ensure you don’t have enough spare cash to pay off your other debts, and which will keep you in the debt cycle: things like income tax, national insurance (health insurance), pension contributions, rent, council tax (property taxes), car loans, student loans & travel expenses.

Why are credit cards so toxic?

Easy answer… because the interest rates on credit cards are so high and because the banks make it easy for you to spend. In fact, I would argue that it’s almost TOO easy to spend money on a credit card, and that their convenience is the very thing which makes them so dangerous. No more fumbling for change in the supermarket. No more worrying about if you brought enough cash to the restaurant. And it’s perfect when you’re shopping with friends and you want to treat yourself to a new pair of shoes or an iPhone of course.

What about when it’s time to pay the money back?

Well that’s where it gets even better: you don’t NEED to pay it all back. You can just make the minimum payment and keep spending. You spent £100 having fun and your obligation is… £5 at the end of the month.

Yaaay! Let’s celebrate!

Forget that you’re paying interest on the money you’ve spent on your credit card at a rate somewhere between 15% and 30% — whilst the banks are obliged by law to inform you what the APR is, they are MUCH more interested in making it easy for you to spend even more money you don’t have, and they will even include “special offers” when they mail you your monthly statement. They will also be keen to tell you how little you need to pay this month, and how little the interest will be: chopping it up into monthly payments makes it all seem so much more palatable of course, but the truth is you’re paying that APR interest rate on the outstanding balance for as long as you’re in debt. And your bank wants that arrangement to last as long as possible.

The other danger is that credit card spending becomes a habit because paying by plastic doesn’t feel like you’re spending real money, and technology makes it easier and easier for us to spend: some cards don’t even require a signature or a pin number these days, so you just wave it in the air like a magic wand and your account is automatically debited.

Again… TOO convenient, and once you take the thought-process out of spending, you take the decision-making out of the equation too: it’s almost as if you need a reason NOT to spend money these days. And that’s crazy. EVERY purchase should be a decision.

Does that mean you shouldn’t get a credit card?

Absolutely not. Credit cards are an invaluable tool: the trick is to use them right and to use them responsibly. In an ideal world, credit cards should be used in emergencies and paid off in full at the end of every month. By all means, take advantage of the other benefits too… the convenience of not having to walk around with a pocketful of cash; the free insurance on your purchases; the air-miles and reward points which can lead to cash savings. But in the end, be aware that banks are only interested in one thing: making a profit.

Banks provide you with a credit card because they know that 99.9% of the population won’t have the self-discipline or the fore-thought to use it sensibly: they know you’re going to get hooked and they know you’re not going to be able to pay off the balance. They also know that you’ll be seduced by their rewards points, by their “incredible deals” and by their “generous” minimum payment terms… that’s why they make the offers!

The question is, will you be one of the 99.9% — one of the vast majority whose lives are spent trying to dig themselves out of debt? Or will you be the one-in-a-thousand whose money works for you instead of pouring out of your bank account each month to pay interest on things you probably never needed in the first place?

The Bottom Line

We live in a world of easy credit – whether it’s a store card, a buy-now-pay-later deal on a new sofa or a low-monthly payment deal on a new phone – it has never been easier to get into debt. And like a crack dealer at the school gates, banks will lure you in with the free offers, keep you high till you’re good and hooked, and when reality finally sets it – when it’s too late to get out – they will start to reap the rewards: sure, you’ll get the special “student rates” while you’re in education, but as soon as you get that graduation certificate in your sweaty fist, that’s when the banks will really start to get paid. And paid and paid and paid.

So as tempting as it is to think that you are different – that you can handle it and that it’s okay to put it off till later – three years of debts will mount up. And the slippery slope starts, not from your last day at college, but more scarily, from your first.

Tread carefully, young credit virgins, tread carefully…