Recent College Grad: Beware The Credit Trap
Our oldest daughter recently graduated from college (1 minus – 3 remaining). She turned to West for an internship that will help her get some certifications she needs. During her college years, our mailbox was full of student loan companies making sure she knew they were there to help her, to loan her what she needed to complete her degree. Now that you have your title, our inbox is full of offers from credit card companies offering you the credit you “need” to get your life going.
I’ve been shredding the offers as fast as they hit the house. And I have shared the trap that these companies are setting for her and her contemporaries. Last week, instead of shredding the deals, I let them pile up in a pile on my desk. We opened them and the first sentences of each letter were quite revealing.
“You worked hard to get your title and that hard work earned you our respect …”
“Congratulations on earning your college degree. As you begin your professional life, you may need to rely on credit to get started …”
“Good work. Let us reward you with a great opportunity to help you build your credit rating …”
This is the normal way this ends for our young adults. As the offers roll in, the recent graduate accepts some of them, feeling great that their hard work has been recognized and with the noble goal of having the cards in case of an emergency. Card companies can have all credit limits in the $ 1500 to $ 2000 range, but the reality is that once the applications are submitted, unless the graduate has already made excellent earnings, most of the time. they will be given a smaller limit, in the $ 500. distance.
Once they have the cards, the temptation to use them becomes almost impossible to overcome. Maybe it’s an item of clothing, a night out with friends, or even a gift for a loved one. The intention, as we all know, is always the same. “I’ll use the card to buy this … and pay the balance when the bill comes.” Then when the bill comes in and the minimum payment is just $ 25, most will pay the minimum because they have other cash flow needs that seem more important at the time. And this cycle repeats month after month.
Credit companies will begin offering increases in credit limits as time goes on. As you can see, the payments are made on time, that little limit of $ 500, moves to $ 750, then to $ 1000, then to $ 1500. If the clock is advanced 5 years, these young adults can find themselves in debt of credit card over $ 20,000, paying minimum payments of $ 500 per month, and not really making a dent in principal balances. It is a cycle of financial paralysis.
My suggestion is that you share this with the young adults in your circles. Make sure they know what’s at stake and why these companies are doing everything they can to lead them into a revolving credit nightmare. Explain to these young people the concept of “delayed gratification” – rather than what credit companies offer – “instant gratification.”
Credit is important, there is no argument. But the proper use of credit and understanding the pitfalls are just as (if not more) important. Spread the word.