A few weeks ago, a customer emailed to ask if I would consider writing a column about the pitfalls of credit cards for young people, especially college students. He said he had a feeling his kids weren’t hearing him and he thought they might get the message if they saw it in the paper.
“This all came up because one of my daughters was in a class where the teacher was talking about the need to start building credit,” he wrote. “Now my daughter and her younger sister want to get credit cards to ‘help build’ their credit.”
“My concern is that they just don’t understand how much interest is charged or about all of the penalties and fees,” he continued. “Not to mention my kids’ lack of budgeting experience. My wife and I speak to them about how credit card companies use predatory practices but that’s just their parents talking. My fear is that my daughters will get comfortable using a credit card while at college when they’re not earning a regular paycheck.”
As a banker and a parent myself, I hope his daughters will listen to their father because he makes some excellent points.
First, building credit is fine but what matters is building GOOD credit. I wish their teacher had emphasized that crucial distinction.
Because here’s the reality. With a steady income, good budgeting and good payment habits, it doesn’t take long to build a good credit history. But since many college students don’t have steady jobs or good budgeting and payment habits, quite a number end up stuck with the very real burden of a bad credit history – a problem that can take years and years to clean up.
Credit card companies offer credit, which often looks like ‘easy money’, to young people who are tempted to spend ‘now’ and hoping to pay it back ‘later.’ Every adult knows people who got in trouble doing just that, including themselves.
In the credit card world where there are basically no ‘good kid do-overs’, being one day late on a payment – just one day! – can trigger penalty fees and ballooning interest rates that can very, very quickly spiral out of control.
That happens all the time. But the credit card companies don’t care. Their position is that they’re dealing with adults, age 18+, and they just want to get paid.
Equally bad is the fact that any payment pattern that shows a person being 30 days late is a serious red flag when buying a car or renting an apartment. Having credit cards that are maxed out or close to the max is bad too.
Are credit cards evil? Of course not! But any responsible adult would give this gentleman’s daughters the same advice he’s giving them, including:
1) Be the exception and wait until you’re financially ready to get a credit card, with ‘ready’ meaning waiting possibly until you’re out of college and working full-time or when you have other bills and are getting into the habit of paying them.
2) If you don’t have the money to buy something, it will only cost a lot more if you put it on a credit card and interest and penalties start accruing.
3) Owing money to a credit card company is a problem you don’t want to have if you don’t have to have it.
A debit card is a practical credit card alternative, at any age. Being able to only spend what you actually have is a great way to learn to successfully manage money (and even make mistakes!) without having to worry about credit card company punitive fees and penalties.
Nick Maffeo is the President & CEO of Canton Co-operative Bank in Canton. “Smart About Money” is a regular column he writes for the Canton Citizen. Have a financial question you’d like to ask? Email to firstname.lastname@example.org.