Some Misconceptions Young People have about Credit

By Nicole Rutledge 12 July 2010

When well-known financial commentator Ben Stein was asked whether he worries about having enough money in the future, he confidently replied that he does not. That’s because he asserted that his “young self” made sure to take good financial care of his “old self.”

His celebrity notwithstanding, Stein isn’t burdened by his financial future because he avoided common money traps in his 20s and stuck to a long-term savings plan. You can do the same by making sure you don’t fall prey to the biggest misconceptions that young people have about money:

“I don’t need to start saving until I’m in my 30s.” Wrong. Saving today creates financial security for the future. In your 20s, you have a small window of opportunity to take advantage of the power of compounded interest. For example:

• If you save $3,000 a year in an IRA between the ages of 20 and 30 (and only between this time period) – and earn an average annualized rate of return of 7% – at age 65 you’ll have $442,000.
• However, if you begin saving when you’re 30 the same amount each year at the same average rate of return until you’re 65, you’ll have $283,000 or 35 percent less than if you had just saved the money in your 20s.

Another way to think about saving in your 20s is this:

Assuming this same 7% annual rate of return, if you begin saving $3,500 per year when you’re 20 until you’re 65, you’ll have $1 million, whereas if you didn’t start saving until you’re 35, you’d have to save $10,600 every year to reach $1 million.

In addition, your young age creates a longer investment horizon and the opportunity to take on more investment risks. To plug in numbers to see how fast your money will grow when you start saving at a younger age, utilize an online  Savings Calculator.

“My parents have it all – so I will too.” A lot of us see the things our parents have acquired and think that lifestyle was quickly realized. However, it’s important to not have inflated expectations about what “living well” means. Remember, you didn’t know your parents when they first started out. They most likely struggled with saving too, and didn’t accumulate a lot of material goods at first. A friend’s college finance professor once stressed that you should always “act your wage.” In other words, live within your means and don’t overextend yourself for the appearance of having more than you really do.

“Bad debt only happens to other people.” According to www.credit.org, a 2009 Sallie Mae study showed that the average undergraduate student owes over $3,000 in credit card debt and in addition to that, graduates with approximately $20,000 in student loans.  Accruing debt isn’t something that happens overnight or a product of one bad financial decision – it creeps up on you. You can’t wrestle your way through your finances by just making minimal credit card payments. Who wants to ultimately pay $300 for an outfit you originally paid $75 for? Unfortunately, many circles of friends often avoid talking about debt. If you feel like you’re not able to keep up with your finances, reach out for help from reputable organizations. And remember: You might not be able to rely on your parents for a financial lifeline because their financial condition may change.

“I’m sure my credit is fine.” With identify theft more prevalent and many of us having numerous credit cards, it’s imperative to check your credit report at least once a year. I knew one college student who had forgotten about a small debt on her credit card – and with interest and fees the debt rose to about $500. The balance was eventually classified as a collection on her credit report, and she had a difficult time qualifying for student loans because of what was originally a minor oversight.

“I don’t spend that much.” Most of what can deter you from reaching financial goals is spending on the “everyday” stuff – not the big-ticket items. It’s Starbucks each morning and extra cell phone charges. I’m not saying that you should sweat all the small stuff, but if you’re an impulsive buyer, you have to remember that spur-of- the-moment purchases add up. For one month, keep a detailed record of everything you spend. Then evaluate where you can cut back. I guarantee you’ll find little ways to save a lot – even if it’s $20 a month. Also check out the services of Mint.com, a free and easy way to track spending.

The key to a healthy financial future is living within your means. This sounds easy, but every choice you make about the house you buy, the car you purchase, whether you eat out or cook at home, has a deleterious impact on your ability to save and live within your means. It requires awareness of an overall goal and doing the math to be sure.

If you want to develop money management skills, becoming financially literate is the best tool to help you avoid financial pitfalls.

Ultimately, time is on your side – and you’re in an ideal age bracket to plan how your “young self” will help to financially secure your “old self.”

Nicole Rutledge is a Certified Financial Planner^® and a Senior Advisor for Orlando-based Resource Consulting Group, the largest fee-only financial planning and investment advisory firm in Florida.

Debt Article In McCleans

Hi Reader's
I just found a really excellent article about the worlds debt ratios, and what to expect in the future as our world ages and financial pressures rise.  The web address is http://oncampus.macleans.ca/education/2010/12/01/what-the-boomers-are-leaving-their-children/ .  Be sure to check it out, and give us a call for savings and debt restructuring while you're thinking about it.  This article really will hit home for a lot of people.

Credit Card News

The recently signed Credit Card Accountability Responsibility Disclosure Act of 2009, also called the Credit Cardholder' Bill of Rights, makes many changes to the way credit cards are regulated.

The following is an overview of the law as it is written; please check out our glossary if you have any questions about any of the credit card terms used in this article.

• Most of the provisions take effect 9 months after the bill is signed, around the end of February, 2010. The new rules about notifying consumers 45 days in advance of any change in interest rate take effect at the end of August, 2009

• Your credit card company must notify you 45 days in advance of any change of your interest rate

• Universal Default is now prohibited

• Two-cycle billing is now restricted

• Your creditor can only raise your rate according to clearly disclosed conditions

• Creditors can only close your account after providing 30 days' notice

• Creditors can only raise your rate under specific circumstances:

• if your rate is tied to a national rate that varies, like the Fed's Prime Rate
• if they previously disclosed to you that your current rate is only temporary (in which case the introductory rate must last for at least six months)
• if you are 60 days late on your payments
• for new credit card accounts, the rate can only be raised after a year has passed

• If you have balances with different APRs (for example, if part of your balance is due to a cash advance and part is from purchases), any amount you pay over the minimum must be applied to the balance with the higher APR first

• Creditors must send you a credit card statement at least 21 days before your payment is due

• Creditors must post the text of their credit card agreements on the web

• Creditors may not charge an extra fee for consumers to make payments by web or by phone, unless you are making a payment on the day it is due or on the day before and need expedited service

• You can only go over your credit card's spending limit (and incur overlimit fees) if you "opt in" to allow overlimit transactions on your account

• Creditors are required to provide details about how long it will take to pay off a balance if you only make the minimum payment required, and how much interest will accrue during that time

• The fees a creditor may charge in connection to a "sub-prime" credit card are restricted

• Many fees on Gift Cards and Stored Value Cards have been banned, and gift cards cannot expire in less than five years

• No one under 18 may be approved for a credit card, unless they are fully emancipated under the law. They may be added to their parent's accounts

• Adults under 21 may not get a credit limit greater than $500 or 20% of their annual income, and college students may not be offered incentives to sign up for a credit card

There are more provisions in the law, including a review of the government's financial literacy education efforts.

While these new provisions will help the typical consumer avoid traps and unfair fees and rate hikes, it is likely that credit will be more expensive for everyone. Many analysts expect annual fees for using credit cards to become the norm. Also, people with poor or no credit history will find it more difficult to gain access to credit card accounts under these new restrictions.

As much as the Credit CARD Act of 2009 helps consumers get fair treatment from creditors, it makes it more important than ever to pay down existing credit card debt to manageable levels and to maintain a healthy credit rating.

Now that they are bound by these new rules, creditors will be looking for customers with the best possible credit before they offer credit cards. Read our "Consumer Guide To Good Credit" (available here as a free .pdf download) to learn ways to ensure your credit report and score are accurate and reflect positively on you.


http://www.credit.org/resources/Articles/archive/167.html

Be sure to check out Integra Benefits for information on restructuring your debt if you or someone you love is in trouble with thier credit cards.