25 Sep 2014
Credit Virgins
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…
Myles Money
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September 27, 2014 @ 1:43 pm
Sage advice! I wish blogs (and, ahem, even the internet) had existed when I was in college because Im sure reading this would help bring awareness about all the spending I was about to do on credit. But no one warned us back then. It’s like cigarettes…why would anyone start now when there is so much info out there saying how bad it is?
September 27, 2014 @ 2:03 pm
I think we all know Tonya, just the same way we know sugar is bad for us, but I think we con ourselves into thinking we can handle it and we convince ourselves we deserve it — whatever treat we’ve decided to give ourselves. I also believe that making it easier to spend has an effect too, like this “no signature, no PIN number” idea: you forget you’re even spending!
September 27, 2014 @ 2:59 pm
Cool site, man. It’s my first time here.
I hate when credit card sellers act like a young person needs to build credit ASAP. What a load of BS. As if life after school is impossible to navigate without a credit card. That’s when the fairly responsible young people get a CC even if they don’t feel ready. The other young people get a CC to use it wastefully. But of course there are many of us who use our brains and either avoid a CC for logical reasons or get one or two or how ever many for sensible reasons.
Personally, I have no credit card. I’m 24 and my financial life is pretty near perfect. Strange.
Crack is whack.
Will recently posted…Side Hustle 1:1: Each Expense Gets Its Very Own Income Stream
September 27, 2014 @ 7:02 pm
Good to hear from you, Will. I just discovered your site too: you’re really living the dream!
I don’t think credit cards are necessarily a bad thing and I can certainly see how they can be useful in an emergency or even lucrative if you’re getting a signup bonus, but the problem is that too few people have enough self-control to use them responsibly and when they DO spend on plastic, they buy into the “minimum payment” idea. It’s almost like they never even stop to think there might be a problem waiting for them down the line. I think financial education would be a good start of course, but sometimes you just want to shake ’em and shout “NOOOOOO!”
September 27, 2014 @ 6:38 pm
I didn’t have a credit card until I was 28! I hated the idea of it. Then I finally got one and my spending went up slightly. Now I only use them on things I NEED like groceries, to accumulate travel points. I try to use cash for entertainment, etc.
September 27, 2014 @ 7:08 pm
You’re obviously using your credit card sensibly, Melanie. You’re not the issue: it’s the people who don’t consider the consequences of “buy now, pay never” that get into trouble because they use the credit card to pay their bills and THEN spend the rest of their cash too, leaving nothing (or very little) to pay off the outstanding debt. The credit card companies are in it to make money of course, so they’re always going to encourage you to make the minimum payment, and telling you your interest for this month is just 1.7% makes it sound like nothing… they’re disguising the real cost of your borrowing and hoping you won’t be bothered to do the math. Fortunately for them, most people don’t. And by the time they realise there’s a problem, the debt has become so large that getting out is a Herculean feat.
September 27, 2014 @ 8:05 pm
I recall a time in college when banks would post up on campus offering free t-shirts to students who applied for their credit card – it was so bad! The laws in the U.S. have changed, since then – but banks can still be pretty predatory on young adults. It’s so important to be careful – but equally important not to be afraid of credit. It’s a good thing, after all!
September 27, 2014 @ 8:49 pm
Thanks for commenting, Katie. I think fear of credit is the last thing we need: understanding is the key, and it really shouldn’t be difficult to make young students (or anyone else for that matter) aware of the dangers and implications of getting into debt because it’s not that complicated.
Used responsibly, I think credit is an amazing tool, but there is GOOD debt and BAD debt, and I think too few people understand the difference between the two. I also think that too few people consider what they’re spending their money on… they just spend. And the credit card companies make it so easy that there are virtually no barriers (and no thought-process) involved. Then the bill arrives and you’re encouraged to pay the minimum and keep spending and “oh, by the way, how about this great deal from one of our partners…?”
Banks and credit card companies know that we’re greedy and weak, and they know that most of us don’t really understand the implications of getting into debt — or at least that we will likely ignore the consequences until the damage is done. And that’s when you become their cash cow, getting milked month on month and never really being able to break the cycle.
I think the problem is that people tend to ignore the issue because their desire for “shiny stuff” is greater than their understanding about the way bad debt and compound interest can dramatically affect their lives.
The thing we’re short of is financial education.
September 28, 2014 @ 5:40 am
Credit cards can be a great tool to live on, and generate bonus money back. They can also help you track your spending, just make sure to pay them off when the bill comes due.
No Nonsense Landlord recently posted…Replacing Your Salary with Rental Property Income
September 28, 2014 @ 9:41 am
I agree that credit cards CAN be an incredibly useful too IF you use them responsibly, but the keywords here are CAN and IF.
In the same way people CAN eat responsibly IF they make a conscious decision to take care of their health, but the ever-expanding waistlines you see all around you and the obesity epidemic we have witnessed over the past 30 years in Western societies are testament to the fact that people are weak and that few are able to resist temptation: I was amazed to discover recently that 95% of the US population are predicted to be overweight or obese within the next 20 years: does that sound like people who CAN resist temptation to you? Does that sound like people who are able to act in their own best interests? Or does it smack of greed, a lack of understanding and a willingness to be lead by clever marketing slogans and advertising?
September 28, 2014 @ 8:15 am
If you can get cash back for using credit cards, I honestly see no reason why anyone would choose to use cash over that.
I don’t buy the argument that it is more “tempting” to use credit than cash – if you can be responsible with using cash, you can be responsible with using credit.
When you can use credit responsible, there are great rewards that await!
Steve recently posted…Working Location Independent
September 28, 2014 @ 9:31 am
Hi Steve. Thanks for commenting. I think you under-estimate people’s lust for the shiny stuff, and the banks are clearly not stupid in this respect: they realise that the best way to encourage people to spend is to make it EASY.
When you run out of cash, your wallet is empty and the temptation to spend is removed. With a credit card, you’ve removed the “no cash” barrier, and that means people can spend beyond their means.
If you have self-discipline, you’re fine: if you make sure you have sufficient cash in your bank account to pay off the balance at the end of each month then paying by plastic is not an issue. But we’re weak and we’re greedy, so you have to take human nature into account when discussing the self-discipline issue, and cash “forces” responsibility whereas credit cards encourage (or at the very least, provide the opportunity for) over-spending.
Credit cards certainly CAN be a very useful tool and we all know that they CAN be used to your advantage. Unfortunately most people don’t use them responsibly, and that’s one of the reasons we currently have such unmanageable levels of consumer debt.
September 29, 2014 @ 12:18 pm
Do you really think that 99.9% of the population do not pay their credit cards on time or do you have stats to back that up?
I do think that it is a high number, but I really don’t know if it’s more than 50% or 75% or even higher. Definitely credit card companies make their big money on interest, however they also get paid fees from the merchants too.
I’m a big fan of credit cards due to the cash back rewards (other rewards are okay too, but currently I don’t use them). However, I’ve heard some people say that they can’t handle a credit card, even though they have tried again after getting their debt under control. For me cash or credit makes no difference to my spending. The cost of the item is the only thing that will persuade or deter me from making a purchase or if it is on sale. I used to be a big sucker for sales but I’ve pretty much curbed that by staying out of stores! ha ha
September 29, 2014 @ 12:32 pm
Hi Debs. Great to hear from you. No, my 99.9% was a “finger in the air” figure which I use to mean “the majority”, but I would certainly be interested to know how many people have a rolling balance on their credit cards and store cards.
I like credit cards for their convenience, but as I mentioned in the article, it is a double-edged sword: it’s too easy to spend on plastic and there are so many incentives and temptations to over-spend.
October 1, 2014 @ 12:37 pm
I was awful with credit until I was around 25. I had a $4,000 balance at one point in college that was made up mostly of restaurant meals. Fortunately, I have grown up since then! I use credit for rewards but pay off our cards religiously.
October 1, 2014 @ 12:57 pm
It’s easily done, isn’t it Holly? The credit card balance increases almost without you noticing it and by the time you do it’s a painful and expensive process to pay off the debt. Student loans, low-cost overdrafts and cheap introductory rates for students who need credit will sucker them in and encourage them to overspend. Then, when they leave the cosy confines of their dorm and enter the real world, they’ll be slammed hard by “real world” interest rates and late fees. It’s a harsh lesson to learn but I think many could avoid the pain by thinking ahead a little.
Credit or Cash? Pick Your Poison - debt debs
October 1, 2014 @ 1:06 pm
[…] was reading on Myles Money the warnings about credit cards to teenagers and students in his post Credit Virgins. It’s definitely a slippery slope and fair warning needs to be given to those that […]
October 1, 2014 @ 3:14 pm
My first mention… I feel like a rock star!