The art of credit: the need for education

Credit cards offer the advantage of “buy now, pay later”. Students are lured into huge cash purchases made on credit cards based upon the false notion that it’s like free money and they run up debts that they spend a lifetime paying off. A recent analysis of student credit card debts from Nellie Mae revealed that 83% of all students have at least one credit card and about 47% have more than four (O’Malley). Median monthly student credit card debt ranges from $1200 to $1900 and according to a nationwide survey, the average undergraduate student loan debt is $18,900(Nellie Mae). The lack of financial know-how is proving to be a liability for students in effective management of their finances. Most parents do not take the time to educate their children about personal finance, and how to minimize expenses(Three step credit card education program).According to a survey conducted by PIRG (1998), most credit card companies target students in order to benefit from their lack of financial wherewithal. Therefore, it would be beneficial to educate students about personal finances and the proper use of credit cards. Education is vital in order to help students manage their finances more responsibly.

Education about credit cards needs to start early. Since a big chunk of the spending public in recent times comprises the pre-teen and teenage market, reporting sales of about 175 billion in 2004, several credit cards are targeting young people through pre-paid, pre-approved credit cards (pre-paid credit cards). However these cards, with their high monthly fees and extra charges are not a cost effective alternative either for parents or the teenagers. In fact, they do a poor job of teaching young people about credit, since most kids do not view them as a means to learn about managing money but rather perceive them as “cool” (pre-paid credit cards).Therefore, teenagers are not going to learn to use money responsibly through such means as pre paid credit cards. Education needs to start early, at school itself and students should not be allowed to spend money indiscriminately, until they have a job and are also taught the responsibilities that go side by side with a credit card – that of paying off debts.

In fact, Senators at Washington are reviewing a bill that will prevent credit card companies from marketing their services on state funded campuses(Senate). Students are not financially savvy and are a prime target for credit card companies, since they epitomize the kind of customer that banks are looking for today – those who are likely to never repay their debts and are likely to spend years paying them, thereby ensuring gains for banks through high interest and fees.

The real key to addressing the credit card problems of debt generated by young people is through a comprehensive and structured system of education, which needs to begin very early, when the students are in school. Together with learning about Math, science and natural sciences, students need to be taught simple, practical every day exercises in managing money. This education needs to continue especially into the student years where peer pressures and financial naiveté often land them deep into debt. Educating students early about financial management may help them to avoid being saddled with debts in later life.

The “Power of Plastic” educational program offered by the College Planning Center in West des Moines consists of an hour long Power Point presentation that teaches kids about how to apply for a credit card, how to understand interest rates and financial obligations in order to avoid getting into debt(Education). This program demonstrates the serious consequences that could result from credit card debt, by highlighting the suicides of two college students who sank too deep in debt. The program has been found to be helpful in educating students about the need to manage their debts responsibly. Such programs are more effective in educating students, as opposed to the practice of offering them pre-paid, pre approved cards which function like an invitation to spend money as if it were free.

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South Dakota high schools are commencing the process of credit card education when their students are in high school, in order to teach them how to avoid falling into endless debt. This program was started because most students are not taught about how to use credit cards, either at home or in school. This educational program comprises a session that teaches students how to find the right credit card by understanding factors such as APR, interest rates, minimum payment, penalties, etc. It teaches students how to choose a credit card and use it responsibly and also imparts an understanding of the consequences of irresponsible use(South Dakota high schools).

The recent move by the Senate to restrict marketing of credit cards to students may also prove to be helpful and most people feel that it’s a good start(Senate). The lawmakers in Washington hope that such a move will prevent students from spending with a credit card before they are in a job and earning money, and therefore in a position to pay debts, rather than relying on parents to pay off the loans. Credit card education needs to be comprehensive, covering the basics such as interest rates, late fees, statement errors, minimum payments and also addressing more serious debt problems with measures such as debit card shuffles and over limit protection(Three step credit card education program).

The educational program cannot be restricted only to students although they are the most vulnerable targets of financial sharks such as credit card companies. Schools can offer valuable guidance to students on how to manage their debts responsibly, through financial advice tailored to meet their individual needs.  Education for older people can also be imparted through Community centers, where those who are still coping with student debts can be assisted with finally intelligent solutions to their problems and debt management and consolidation measures.

The need for education on credit card use appears as a vital necessity in view of rising debts being incurred by students (O’Malley). They are in fact, only following the example of their parents who put everything “on the card” and are even paying taxes through credit, which in turn increases their debt. Education about credit card use is the only way in which responsible financial management can be inculculcated into students.