Use and Abuse of Credit

The use of credit cards is much more dangerous than use of checks or cash. Paying with cash is very easy; for knowing how much money is available and how much can be spent makes it very hard to get into debt. When paying with a check the process is a bit trickier; the exact balance has to be kept on the account at all time. Knowing what this balance is and continuously replenishing it can be quite hard. Nevertheless, even with a check consumers cannot get into a lot of trouble. If more money is spent then the shopper has on the current account, the last written check will be rejected and account will be suspended until the balance is paid off. With credit cards however, every year more and more people get into debt.

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.

However 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. According to Nellie Mae, a student loan provider, the average college undergrad has $1,843 in credit card debt. 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.

For many incentive programs tend to be deciding factors for whether to cash or credit. According to a nationwide telephone survey of 1,000 people by the Cambridge Consumer Credit Index, only about one in four consumers said rewards programs have a great deal or good amount of influence in encouraging them to charge purchases on credit cards instead of paying cash.

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.

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!

It is when we do not follow these basic principles that we run into issues. The graph that is attached shows us a breakdown of age of head of household and family income. The chart shows the increase of those having a general purpose credit card as well as the increase of media balance. Unfortunately, there are more ways to use a credit card than ever before, making it very hard for consumers to refrain from spending a lot of money. Shopper can charge groceries, teeth cleanings, and on-line services to their credit cards. Introduction of rebate cards – which offer users credit towards new vehicles, frequent-flyer miles, and cash backs has attracted a lot of shoppers, making them pay for things that they would normally pay with cash or checks.

Credit cards are probably money of the future. Most of today’s consumers are not ready for this paper-less way of payment. Shoppers have to get used to using plastic cards as carefully and intelligently as they would paper money. And although it is much easier to use a little piece of plastic, people have to watch out for high interest rates and overdue payments.

Credit Card Use, 1989-1998

General-purpose credit cards include Mastercard, Visa, Optima, and Discover. All dollar figures are given in constant 1998 dollars based on consumer price index data as published by the U.S. Bureau of Labor Statistics.

Percent of cardholding families who:

Age of family

head and family

income1Percent having a

general-purpose

credit cardPercent having

a balance after

last month’s billsMedian

balance2Almost always

pay off

the balanceSometimes

pay off

the balanceHardly ever

pay off

the balance

1989, total56.0%52.1%$1,30052.9%21.2%25.8%

1992, total62.452.61,10053.019.627.4

1995, total66.456.01,60052.420.127.5

1998 total67.554.71,90053.619.326.9

Under 35 years old58.371.61,50039.022.538.5

35 to 44 years old71.362.52,00046.519.134.4

45 to 54 years old75.359.22,00048.222.729.1

55 to 64 years old76.048.82,30061.020.118.9

65 to 74 years old71.233.91,00074.014.911.1

75 years old and over50.816.770086.37.85.9

Less than $10,00023.264.090046.419.933.8

$10,000 to $24,99950.856.91,20052.319.328.4

$25,000 to $49,99973.258.21,70048.320.531.2

$50,000 to $99,99989.655.92,40053.920.225.9

$100,000 and more97.936.43,10072.013.814.1

1. Families include one-person units. 2. Among families having a balance.

Source: Board of Governors of the Federal Reserve System, unpublished data. From Statistical Abstract of the U.S., 2001.

Works Cited

“Credit Card Use, 1989-1998.” 5 May 2003 .

Cambridge Consumer Credit Index. ” Cards with Rewards.” 5 May 2003 .

Mae, Nellie. ” Credit Card Debit for students.” 5 May 2003 .