Young People and The Chains of Credit Card Debt

A few days ago, Travel Blogger Buzz, placed an article at the bottom of his daily post about young people and credit card usage. Written by Brian O'Connell for the website, www.dimespring.com, his article delved into the question about young people and their use of credit cards. This article stirred something inside of me.

O'Connell writes, "That may not be the case when it comes to young consumers and credit cards, as younger card holders are wasting no time accumulating debt, and are taking their sweet time paying that debt off." The article centers around a Ohio State University study released a few days ago which learned:

              "that young people born 1980 to 1984 had on average over $5,000 more in credit card debt
               than their parents at a similar point in their life and slightly more than $8,000 more
               when compared to their grandparents.

               In addition, the results suggest younger people are paying off their debt more slowly,
               too. The study estimates that the children’s payoff rate is 24 percentage points lower
               than their parents’ and about 77 percentage points lower than their grandparents’ rate."

This graphic summarizes their study nicely:



When I graduated from college, I was $4,000+ in credit card debt (and this debt was on non-mileage earning credit cards - as I only recently got in the game). This debt was the culmination of Spring Break trips, late night beer and pizza runs, and not caring about where my money went. I always though that I could pay down my debt faster after college, when I "got a real job."

I got that real job with that real salary, but then the adult expenses came rolling around. I started having to pay my own rent, which in Washington, DC ain't cheap, my cell phone bill, and then I decided to go back to graduate school by paying for cash. After all my expenses, the money I could put towards debt repayment was small. On top of this, I was putting more debt on my credit card. I kept on rationalizing that my next bonus will clear all the debt. Well...it didn't.

Finally, I got sick one day looking at my credit card balances. Literally sick to my stomach. I think I threw up that morning. How did I allow myself to get this chain of debt attached to my leg? I decided to stop the madness and go on a strict cash diet. I cut my expenses by 70%, brought my lunch to work, reduced my nights eating out and restricted money spent on my social life. However, I paid off my debt accumulated in college ($4,000) in 24 months. 24 months to pay off those late night pizza and beer runs and that trip to Spain. What was I thinking in college? I don't remember what the interest payments added up to for the debt, but it was expensive. Not worth putting that pizza on the credit card.

Why do I bring this article up and my personal experience? A big part of winning the "game" is applying for credit cards for their sign up bonuses, spending the minimum required for the bonus and closing the card shortly their after. The big bonuses are eye popping and once you learn where those points can take you, the appeal of them gets more and more appealing. One can get caught up in the game and this is the where the real danger begins.

Let's take a young person, who reads about the fabulous trip reports by Lucky or The Points Guy and wants to emulate them. He reads that the best way to get your own amazing trip reports by signing up for credit cards for their bonus. This post is not laying blame on any one blogger. I use Lucky and The Points Guy as people who put together amazing trip reports. This young person is attracted to Chase Sapphire, because its cool looking and comes with a greats sign-up bonus of 40,000 points. However, he has to spend $3,000 in 3 months for the bonus. He is approved and the card is now in his hand. As recommended by the Bloggers, he puts everything on his credit card. Now, he is in his last month and he still needs to spend $1,500. He researches easy ways to meet credit card spend limits; he buys gift cards, VISA prepaid cards and even funds a KIVA account. 

Good News:  He hits the minimum spend and earns his 40,000 points

Bad News: His credit card balance is $2,200 with no real way of paying it off, so he continues to make the minimum payment only - it would take him about 191 months or ten years to pay off the debt.

Is 10 years of payments worth 40,000 points?

The real trouble probably does not happen by Joe Schmoe getting one credit card. Its most likely happens when he tries to get two or three credit cards with a combination of minimum spends of $5,000 or $7,500 in three months at the same time. He will ensure the minimum spend requirements are met and worries about paying off the debt later.

Can you see where the "game" can becomes dangerous.? One can easily get caught up in the game. Do whatever it takes to get to the next free night, flight or status level. Before you get a credit card, you need to ask yourself, can I meet this bonus threshold in the maximum time frame. When I applied for the Starwood AMEX, I only applied for that one card as I was fearful, I could not meet the $5,000 minimum spend requirement in 3 months. $5,000 is a lot of money. I barely hit the $5,000 and now I know that is my limit.

Before you apply for a credit card, you need to ask yourself three questions:

           1)   Would I be able to hit the minimum spend requirements in the prescribed time?

           2)   Will I spend frivolously on things I don't need to meet the spend requirements?

           3)   Do I have the means to pay off the debt put on the credit card within 30 days?

If your answers are Yes, No, and Yes, then you need to ask one more question, "Will this hurt my credit?" Your credit rating is one of the most important assets you have. Your score is something that you have direct control over. This 3 digit score controls so much of your future: from your ability to get your dream job to being able to buy your dream first home. (Today, the difference between a person with a 720 credit score and 680 is 1/4% increase in rate - or  $170 more a year per $100,000 borrowed). As a mortgage loan officer, I have seen hundreds of credit scores. Some great, some good and many bad. One of the common threads of those who have bad credit is the amount of debt vs. maximum credit limits. Typically, when I talk to borrowers about the size of their debt or missed payments, it steams from their 20s. In our 20s, we are under the belief that we are invincible and we lack the focus for the future, so we make stupid decisions.

I concluded this post by urging all young people to live a credit card debt lifestyle. Live within your means. I am not advocating not getting credit cards, because the lack of credit cards can hurt your credit even more than excessive credit card debt. What I am urging all young people thinking about entering the "game" or already playing the game, is to think smartly. Ask yourself the three questions above before applying for every credit card. Track your credit report and score, by using your three free reports provided by www.annualcreditreport.com or use credit monitoring services like www.creditkarma.com. Power is knowledge in the credit game. Ignorance of your credit will only lead to trouble year later, when it time to make major decisions like a car, house or dream job.

Take it from me...paying off trips and dinners taken two years ago, sucks. No amount of points is worth adding the chains of debt to you.