One thing I have not written about is how I feel about credit card companies targeting people who not only are not in a position either psychologically or financially to take on debt, but the effects of people such as these groups who end up with huge amounts of debt at times in their lives when they can least afford to have it.

These people are college students. At one time, even Aunt Toby and her beloved DH, both working, could not even get within smelling distance of getting a credit card. That was before the banking laws were changed in the early 1980s. Soon thereafter, we were inundated with credit card offers. We were not the only ones. As banks and credit card companies started to realize the overwhelming amount of money that was to be made by sticking a hunk of plastic into people’s hands and encouraging them to go shopping, they started to look for other groups of people to market debt (woops, credit) to – and one of the first was to college students. They not only went after college students with mail, special events, advertisements in college newspapers and so on, they also marketed themselves to colleges and college organizations themselves. They gained access to college student records, their home addresses, phone numbers and so on. Students were inundated with multiple card offers constantly.

Students who don’t have any visible means of income. Students who more than likely already had Guaranteed Student Loans and other forms of financial aid.

Students who could not afford to take on any more debt.

“In each year between 2000 – 01 and 2006 – 07, an estimated 60% of bachelor’s degree recipients borrowed to fund their education. Average debt per borrower rose 18%, from $19,300 to $22,700 in 2007 dollars over this time period…. In 2008, 84% of undergraduates had at least 1 credit card, up from 76% in 2004, the last time the study was conducted. The average number of cards has grown to 4.6, and half of college students had 4 or more cards.
Undergraduates are carrying record-high credit card balances. The average (mean) balance grew to $3,173, the highest in the years the study has been conducted. Median debt grew from 2004’s $946 to $1,645. 21% of undergraduates had balances of between $3,000 and $7,000, also up from the last study….The average outstanding balance on graduate student credit cards is $8,612, an increase of 10% from the 2003 average of $7,831.”
Student Debt Stats

We’ve discussed what credit card debt really costs Atkins For Plastic

Now we can discuss the new federal legislation that changes the way that credit card companies can approach college students from now on:
“The bill also addresses some of the worst abuses of credit-card use on campuses. Without a co-signer, full-time college students under 21 will be confined to what amounts to credit-card training wheels, with credit restricted to 20% of a student’s income. The presence of a co-signer protects college students from sudden rate increases; under the new law, a student’s co-signer has to approve any such hikes.”
That’s the good news. 20% of a student’s income. If a student has no income of his or her own, then that student can’t be given a credit card. On the other side, however, the bill did nothing about the access that colleges give to credit card companies in the first place:

“,…the sweeping law, which takes effect in nine months, doesn’t address every college credit-card controversy. Most notably it does little to address affinity-card contracts, which encourage colleges and universities to sell students’ contact information to credit-card companies. These often confidential contracts bond hundreds of schools across the country with credit-card companies eager to sign up undergraduates. In some cases the school’s financial reward increases handsomely when students frequently swipe their cards…”

Indeed, many students, under increasing pressures of exploding rates of tuition and fees and moribund financial aid programs, have turned to using their credit cards to pay for education.

“College students aren’t just swiping their cards to pick up pizza tabs or buy school-spirited sweatshirts. They are increasingly using them for such big-ticket items as college tuition. Just five years ago, 24% of students charged a portion of tuition to a credit card — a number that has grown to about 30%, according to Sallie Mae.”
College Students Debt

Even a college loan would not be charging the rates of interest that credit cards do. And in today’s economy, where this year’s graduates, it is estimated, only have a one in five chance of having a job at this point, how will recent graduates pay off these balances, which will be growing…and growing…and growing with all the late fees, and increased interest as we saw in the example on paying the minimum balance.

In any economy, young people just starting out are actually a vital part of the economic engine. Whether it is buying a car, furnishing an apartment, getting married, having children, or saving up for a house – young people between the ages of 22 and 30 are a vital part of the economic pipeline. Anecdotal evidence suggests that this vital piece of the machinery has actually been stalled for quite some time, as young people, burdened with huge amounts of debt upon graduation and largely without high paying jobs to repay that debt, cannot afford to get married, cannot afford to get an apartment of their own, cannot afford to buy a car..cannot afford to participate in any meaningful way in growing the economy.

The vibrant economy really does require people to spend money. Hopefully they are spending it on sensible sorts of things and saving and investing for the future.

But they can’t do it if they are starting out their lives with something approaching $30,000 in debt, most of which they have to pay off in ten years.

Here is an example
Loan Balance:
$30,000.00
Adjusted Loan Balance: $30,612.24
Loan Interest Rate: 6.80%
Loan Fees: 2.00%
Loan Term: 10 years
Minimum Payment: $50.00

Monthly Loan Payment: $352.29
Number of Payments: 120

Cumulative Payments: $42,274.24
Total Interest Paid: $12,274.24
Note: The monthly loan payment was calculated at 119 payments of $352.29 plus a final payment of $351.73.
The loan balance was adjusted to yield $30,000.00 after deducting the 2.00% loan fees.
It is estimated that you will need an annual salary of at least $42,274.80 to be able to afford to repay this loan.
Student Loan Payments

For me, the lightbulb moment is that last sentence: ‘need an annual salary of at least $42,274.80 to be able to afford to repay this loan.” How many students do YOU know who, upon their bachelor’s degree graduation, have a job in hand that grosses over $42,000? Me neither.

Something much more dramatic must be done to deal with the relationship between colleges, college students, student loans and credit card debt. The current bill is already being screamed about by credit card companies and banks and even this does not go nearly far enough. President Obama has already talked about student loans – Aunt Toby is sincerely hoping that that situation can be radically changed, otherwise, we truly will return to the days when college was affordable only to the rich.

I’ve got…12. That is just moi. We are NOT an average American family, which in 2004 had 8.

Frontline Credit Show

This show gives a great overview of how Americans came to live on a diet of plastic (did you know that South Dakota, the price of shipping corn, and banks on Long Island are the magic combination?).

But that show was in 2004 (thought there are updates on the site). For more current statistics on credit card related stuff, go to:
Cardtrak statistics

So, what do these bits of information have to do with our friend at the top and ‘just one thing’?

Aunt Toby wants you to, as usual, take out paper and pencil and think about how you pay for the stuff and services you buy. If you save receipts, then it becomes easier still; the evidence is right there at the bottom. How many dollars a month do you spend – and how many of those dollars go straight to your credit card balance?

The reason I ask this is the issue of minimum payments. A lot of us end up making the minimum payment because we just don’t feel we’ve got enough money to pay more. This is a big mistake. If you want to know what the real cost of making minimum payments on credit card balances is, go here:

What things cost if you only pay the minimum on the balance

Input your credit card balance, the percentage interest and the minimum payment (as expressed in a percentage – I used 2.5% in this example). The answer box shows just how long it takes to pay off the balance if you pay the minimum. In 2004, 25% of all credit card holders did that – with the average amount of credit card debt per family of $8000.

At 18% interest, it takes 360 months to pay off an $8000 balance at the minimum. 360 months is 30 years – on $8000, that is $11,615.32 IN INTEREST!!! That is just on the balance at that point in time – and we all know that we just keep adding to that balance as we go. We’re all paying huge amounts of interest.

If you looked for a loan, you’d never sign up for an 18% loan. Home mortgages today are in single digit interest rates. Why would you sign up for a loan at 18% – that is what you are doing when you buy stuff on credit and do not pay it off that month.

Or, look at this on the investment side: What is the best rate you can get for a savings account – a dividend-bearing stock or an interest-bearing municipal bond? 4%? 5%? So why give banks and credit card companies 18% income?

To get the EFFECT of getting 18% income — use cash for everything or if you are going to use credit cards, pay the bill 100% off at the end of the month. You got the float between when you bought and when you paid to make money in your savings account AND you got rid of the debt before the 18% interest charge kicked in.

But, you say, Aunt Toby..it’s sooooo hard….I loves the plastic! Well, sweetie, the answer is to start with just one thing, especially one that is consumed, like gas or groceries. How much are you spending on that one thing? Be a little bit parsimonious with yourself and save up that money – jar, envelop, coffe can out in the garden, it makes no difference as long as you’ve got that little hoard of cash to start with. Then use cash, a check or a debit card (and write it into the book and balance on an ongoing basis). Do that for a month. Hey – you did not use the plastic for a month for that one thing!!! Hurrah for you!! Then, add the second one – let’s try groceries this time — get into the practice of NOT using plastic every single time. At the same time, make chunks of payments on that balance and get rid of it. Do the Grover Norquist thing and make it small enough to drown it in a bathtub.

And then, step away from the plastic, …and no one will get hurt.

The young lady whose blog I was reading, a couple of months ago faced a financial crisis – she and her husband have one of those “modern relationship arrangements” – she pays hers; he pays his; they pay the household stuff together. So, when her credit card balance got to be the size of AIG’s bailout, she had to do some negotiating with her DH in terms of how to pay that sucker down because she couldn’t afford the minimum payment any more.

Now, this is all well and good. Her DH was kind, nice and nurturing – he took the credit card away and told her to come up with a plan. He even recognized that she could not go “cold turkey” and she came up with this: She would get $10 a week to spend however she wanted to. This did not include costs like lunches, car fare (what a homey, old fashioned term that is) and so on. This was her “play money” and she could spend it however she wanted to.

Ten dollars. $10.00. This, for a woman whose purchases had produced a credit card balance that required her to make a fairly humiliating appeal to her husband for her own personal bailout.

Now, looking at this, I said to myself, “She can go about this two ways: She can save up these weekly allowances and get herself something good and nice once a month – or, she can fritter it away on nonsense because you really can’t get anything of any value for $10.00.”

This woman proved me absolutely wrong and showed me one huge reason why we are in such a big mess at the family financial level.

Her belief, at least at first, was that her problem was the amount of money she was spending on an ongoing basis. So, she felt she was holding up her part of the deal with her DH by only spending $10.00 a week. On a quantifiable basis, she was probably correct. She detailed in her blog her adventures spending that $10.00. It makes for some very interesting reading. I’ve never seen anyone who squeezed out so much sheer stuff out of one $10.00 bill a week.

And you know how she did it? She found all the thrift stores in the area. In any given week, she was bringing home between 5 and 8 items (some small, like accessories priced at 50-cents; some somewhat larger, such as a coat she got for $8.00). Sometimes, she even had money left over from that $10.00 bill, which she rolled over to the next week so that she could buy even more.

After about a month of this, she woke up to the same thing I saw almost immediately – her problem was not spending money – she has a shopping addiction. Her only form of personal entertainment involved the hunt for and the acquisition of sheer volumes of stuff. Stuff that sat in her closet and was never worn, stuff that was worn only once or twice, stuff that she’d seen in other fashion and shopping blogs (and I don’t want to even try to estimate how many of those there are).

She isn’t the only one. I’m sure there are millions of people out there who are in the same situation, because:

1) They have a credit card, which, as we know, is seen by many as “free money.”
2) People are working more and more for less and less – they tend to treat themselves with things like shopping and eating out.
3) The concept of leisure time and what to do with it has gone through a huge change.
4) The ability to find and acquire stuff requires basically no effort – no one has to go to the store for anything anymore except perhaps for gasoline. Everything else can be ordered over the internet and delivered.

As we go deeper into America’s own personal financial hell hole, one of the things I’m going to question is – how are families going to deal with this situation? A lot of families no longer spend any time together; taking the credit cards and the car keys away from Buddy and Sis is going to be a huge change. How many families do you know who never eat together any more? Where family members retreat to their own rooms – don’t interact often; don’t have really good “getting along with others” skills, have no real feel for “being a parent” or of “being a child in a family”? How many families substitute ready access to and the providing of “stuff” to family members for actual family based activities? How many families have members who are addicted to shopping?

America’s collective “financial cold turkey” is going to be very shocking and nauseating – I’m wondering how we will all get through it.