Oran Hall | Youthful credit card indulgence
ADVISORY COLUMN: PERSONAL FINANCIAL ADVISER
QUESTION: I am a 21-year-old female, and I took out a credit card when I was 18 – worst mistake. My card is now in bad debt, even though I have been paying consistently – unfortunately, not the minimum they required me to pay. They have given my information to an outside collection agency, and I'm so stressed as I am going to school, paying school fees by myself. I want to buy a car to put on the road, but the credit card has hampered this. I don't know how I would get the response. I would really appreciate your advice.
FINANCIAL ADVISER: I find this quite troubling, for it seems to me that you, like many young people who write to me, do not seem to understand what you are getting into when you open a credit card account and only wake up when the situation reaches very serious crisis proportions.
My first concern is why an 18-year-old just barely entering adulthood, and perhaps just entering the world of work, would want to use a credit card not for shopping conveniently but for assuming expensive debt.
Let me admit that we added our children to our credit card account as soon as they started university at 18, but it was very clear how it was to be used. As soon as it was appropriate, they were weaned, but it helped them to start building a good credit score early.
It does not seem to me that many people – young and not so young – appreciate how costly credit card debt is with interest of about 50 per cent per annum. It gets worse: interest is charged on the full amount of the debt if it is not paid in full. So if the debt is $50,000 but the cardholder pays $45,000, interest is computed on the $50,000, not $5,000.
You mention that you have been paying – but not even the minimum sum required. Paying the minimum would hardly help, anyway; the minimum sum for payment now being set by the card issuers is so low, one wonders if their real intent is to allow the balance to grow as fast as possible.
Of course, that would not help the borrower who suffers an accelerated fall into the abyss of debt and creates challenges for the creditor who finds it hard to collect on a debt that is unsecured.
Any person – young or old – who is considering assuming credit card debt must first consider the cost, not just in terms of the interest but the damaged credit rating, mental and emotional trauma, and, in some cases, the negative impact on physical health.
Beware debt collectors
From the outset, one good way to bring some order to the use of the card is to study the statement, which shows the transactions, to see if it is being used effectively and responsibly.
One message that comes over very clearly is that some users of credit cards who encounter problems seem surprised when the financial institutions take action to recover the money rightly due to them. Making regular payments does not matter if there is a debt that is getting worse, and they must collect what is due to them and will turn to third-party collection agencies if they consider that approach necessary.
Bear in mind that it can get worse as more serious legal action is another option available to them. Financial institutions exist to make money, not to be altruistic; when they issue credit cards, they are not giving away money.
It is clear you want to move ahead and seem to be funding your schooling. That is very commendable, but please take your time. I assume you “want to buy a car to put on the road” to generate income to take care of your educational and other expenses. It is such a pity you did not make that a priority over assuming credit card debt.
One option that some people in a position similar to yours resort to is to get what I will call a regular loan with set monthly payments and a known end date. Being in a bad debt situation can make it difficult to get such a loan, not to mention that you would need to have a reliable source of income to qualify. It seems that it is easier to get a credit card than to get a loan for other more meaningful endeavours.
For what it is worth, have a discussion with the collectors and see what arrangement can be made. Is there any way that you can earn some income in these very challenging times?
Oran A. Hall, principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel.