Some Warning For You – Beware of the Credit Trap

Our eldest daughter recently graduated from college (1 down – 3 to go). She headed West to take an internship that will assist her in obtaining some certifications that she needs. During her college years our mailbox was filled with Student Loan companies making sure that she knew that they were there for her – to lend her what she needed to complete her degree. Now that she has her degree – our mailbox is full of offers from credit card companies offering her the credit that “she needs” to get her life in full gear.

I have been shredding the offers as quick as they come into the house. And I have shared with her the trap that these companies are setting for her and her contemporaries. Last week instead of shredding the offers – I let them accumulate in a pile on my desk. We opened them and the first few sentences of each letter was quite eye-opening.

“You worked hard to achieve your degree and that hard work earned you our respect… “

“Congratulations on achieving your college degree. As you begin your professional life you may need to rely on credit to get you started… “

“Great job. Let us reward you with a great opportunity to assist you to build your credit rating… “

Here is the normal way that this ends up for our young adults. As the offers come in the recent graduate accepts a few of them – feeling great that their hard work has been recognized and with the noble objective to have the cards in case of an emergency. The card companies may tout credit limits in the $1500 to $2000 range – but the reality is that once the applications are submitted – unless the graduate has already achieved excellent earnings – most times they will be given a smaller limit – in the $500 range.

Once they have the cards the temptation to use them becomes almost impossible to overcome. Perhaps it’s a piece of clothing, or a night out with friends, or even the purchase of a gift for a loved one. The intent – as we all know – is always the same. “I will use the card to purchase this… and I will pay the balance off when the bill comes in”. Then when the bill comes in and the minimum payment is only $25 – most will pay the minimum because they have other cash flow needs that seem more important at that time. And this cycle repeats itself month after month.

The credit companies will start to offer increases in credit limits as time moves forward. As they see payments being made on time – that little limit of $500 – moves to $750 – then to $1000 – then to $1500. Move the clock ahead 5 years and these young adults can find themselves in $20,000 plus of credit card debt – paying minimum payments of $500 per month – and in reality making no dent in the principal balances. It is a cycle of financial paralysis.

My suggestion to you is that you share this with any young adults in your circles. Make sure they know what is at stake and why these companies are trying their best to get them into a revolving credit nightmare. Explain to these young adults the concept of “delayed gratification” – instead of what the credit companies are offering – “instant gratification”.