Friday, August 15, 2008

You Can’t Purchase Financial Freedom with a Credit Card

Cynthia Crawford, Ph.D.[i] and Robert Weagley, Ph.D., CFP®

University of Missouri

A few years ago we did an informal survey of students at the University of Missouri and Missouri State University. We asked them what three things they would recommend to a student that was just graduating from high school and beginning their time at college or university. The “hands down” most popular warning was to encourage young people to avoid credit card debt. Many mentioned that they had not understood that it was not “free money”.

Some days it feels like we’re the only people in America cautioning people in their use of credit cards. Yet, if many of your peers could speak to you about it, they would join our chorus.

First, we would be wrong to say that all credit is bad. Credit fuels much of our economy and, if the debt is being used to create wealth through investments in one’s human or non-human capital, it is a tremendous tool. Credit is convenient. Credit cards are much safer to use than carrying a pocket full of cash. It can be the key to solving many emergencies. As such, credit is not bad.

Unfortunately, however, financial problems are the main reason students exit college before earning a degree. Major universities report (and MIZZOU is no exception) that more students report considering leaving school due to credit card debt than due to their grades!

What causes this? Oftentimes, students report to us that they are anxious to build their credit history and to rush into indebtedness. We have to ask them, “What’s the rush?” Credit is easy to access in today’s marketplace and, most importantly, the “good” credit you might seek to purchase a home or to pay for graduate school will depend more on your ability to demonstrate the businesslike management of your personal finances. What you do not want is a bad credit history. A bad credit history is worse than no credit history.

The National Endowment for Financial Education (NEFE) points out there are five steps for building good credit:

1. Pay your bills, such as rent and utilities, on time.

2. Make loan/credit card payments on time.

3. Pay your loan payments first. Then, spend money on other purchases.

4. Apply for only the credit you need. Do not apply for all the credit you can. Each new credit card counts against your credit score.

5. Never overdraw your checking/cash account.

Using a credit card is spending your future income in advance so, when it is time to pay the credit card bill, you need an income that exceeds your current spending. This is not the usual description of a college student. Consider the following, if you think you need a credit card, discuss it with your parents - not the bloke from the credit card company that is offering you a free T-shirt. Then, when you get a credit card, get only one credit card, use it wisely, and pay it off every month. Better yet, avoid credit cards altogether until you get a full-time job. We know that many people with full-time jobs can’t pay off their credit card balances each month. One has to ask, as a full-time student, what are the odds you’ll have better success?

Financial patience is not a bad thing. In fact, financial patience depends on personal discipline a key ingredient to financial success.

- Robert O. Weagley, Ph.D., CFP(r)

Chair, Personal Financial Planning

University of Missouri

Columbia, MO 65211

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