I am on the record as having said that I believe students should sign up for credit cards. There are many reasons for this, but chief amongst them are the facts that you need a credit card to do anything online, and you also should have one in order to begin building a credit rating. Having a decent credit rating is essential for your life after school, and will save you thousands of dollars in interest fees as a young adult. Yet many smart people still disagree with me on the subject. What valid reasons have they for this?
The Financial Death Spiral
Likely they have several reasons and they all the bear the names of young undergrads that they have watched spend their way into a deep hole. It is unfortunate that so many students fail to understand the basic fundamentals of personal finance and how money works. It is undeniable that credit cards are dangerous and debt is plaguing students. The most recent study I could find dated all the way back to 2004 (Nellie Mae) and it revealed that the average undergraduate student carried a balance of over $2,000 on their cards. I think it is safe to assume that those numbers probably haven’t went down too much (in fact, in Canada, I’m sure they have risen) as our addiction to debt has only grown. With cash flow already a problem for students, paying hundreds of dollars in debt servicing (interest charges) fees to credit card companies can quickly lead students into a downward spiral they don’t truly understand until they are at the bottom looking up. If a student doesn’t have the money one month, they borrow, now the next month they will have even less money, due not only to the principle payback, but interest charges as well. What are the chances that the student will suddenly deny immediate gratification when they couldn’t before? Very slim indeed, and so more money is borrowed and the spiral begins.
NINJA – No Income, No Job or Assets
A quick look at credit cards statistics for the population at large might lead us to believe that students aren’t really any worse off than the majority of the population, but students are in an exceedingly vulnerable position. They rarely have any assets to shift around (for example, taking out a HELOC on a house in order to consolidate debt) and they usually have very limited cash flow. Once the debt cycle begins, it is extremely hard for most students to break without dropping out of school to work full time. Of course, once they do this, their student loans need to be paid back and they are likely working at a much lower-paying job, and with poorer career prospects than they would have had, had they finished their degree or diploma. It really is that simple for many students who don’t understand debt properly.
Debt? It Was My Major… Saving? Dropped It
As students, we have two huge factors going against us. The first is that many of us have never been properly educated on how money and debt actually work (as crazy as that is from a big picture perspective). The second, is that we are conditioned to accept debt as a natural course of life. Most students these days live on massive student loans, and being ‘in the hole” is the norm. This encourages an unhealthy view towards debt in my opinion. The strong suit of most 17-21 year olds is definitely not delayed gratification, or planning for the future (especially in our generation). So what do we do? We throw gobs of money at them, tell them it has to be paid back at some point in the “distant future” (think about what 25 looked like when you were 18), and then tell them to learn how currency works. It is really any wonder that credit card companies find this mindset an absolute gold mine to cash in on?
This eventually all leads back to my unholy crusade that students desperately need to learn more about personal finance in high school. There are crucial differences between student loan debt (which is still taken way too lightly) and credit card debt. Student loan debt has delayed payments (usually almost up to a year after graduation), it is also tax deductible, and almost always at a much lower interest rates. Students need to understand just how massive the difference can be between a 4-8% interest rate on their student loans, and a 10-30% interest rate on their credit cards.
Credit Cards Don’t Kill Net Worth – People Kill Net Worth
The problem really isn’t that credit cards are dangerous. Those are just a tool (like all money) and quite a useful one at that. The problem is with the lack of knowledge we send our youth with into the world, and the general mindset of embracing debt that currently pervades university and college campuses throughout North America. It really isn’t that hard guys, don’t spend the money if you don’t got it, pay the cards of at the end of the month, and enjoy the cool stuff they give you in addition to the benefits of a solid credit rating.