The Debt Generation
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Credit cards are hailed as convenient tools, a way to build credit and earn points or rebates. However, there is another side to credit card spending, experienced by many who pay less then their balance month after month and one that can lead to a downward spiral that is difficult to rebound from.
Generations X and Y, those aged from 14-42 are being hit the hardest. Unlike their Baby Boomer parents, they are more likely to start off their working careers already in debt. While student loans and other education related debt make up a great chunk of that for many, credit card debt is also quite high and on the rise for young people-some high-school students even have their own credit cards, something unheard of a generation ago.
So with all that money going to iPhones, PSPs, and the latest designer duds, is this generation just plain spoiled? Not so fast grandpa. Many in this generation are broke-or close to it-but the blame came be placed squarely on starting out in debt and having to struggle with high-interest rates, not on extravagant living.
According to personal finance counselor Sophia Jackson, credit card debt is an epidemic among the under-30 crowd. College students average $2,200 in balances on their plastic, says Bankrate.com. Graduate students have more than double that amount, and high interest rates translate into hefty monthly payments and long-term balances for many.
The bottom line is that most teens and young adults just don’t have the life experience needed to comprehend the implications of paying back their loans or debts when they take them on. And let’s get real for a minute, how can a 19-year-old student be expected to grok the reality of paying back thousands of dollars in college expenses when he’s buying books, food and clothes, excited about the upcoming semester, sports and college life? The numbers don’t have much basis in reality, and it’s a natural assumption to think you’ll be able to pay off the balances as soon as you graduate and land a high-paying job. Combine this with the fact that college teaches you nothing about personal finance and you’re facing a financial mess right at the start of your adult life.
Many will pay minimum payments on their loans for years, either not realizing how much is going to interest just to service the debt or simply not having anything extra to throw at the principal. With young credit, new credit or no credit, interest rates are often in the high double digits, lowering the chance of fast repayment.
Ironically, low credit scores from high debt-to-income ratios, high credit card balances and missed or late payments can affect your job and income potential. Many employers do routine credit screenings and background checks on applicants; security clearances are also in jeopardy for those with bad credit.
A weak economy further impacts your ability to repay loans. When high-paying jobs are scarce, many find themselves jobless for short periods or working lower-paying jobs than they expected. Without lifetime savings or investments, the younger generation falls into the trap of adding on more credit card debt or, at best, is only able to pay minimums on current debt and not get ahead of their bills.
Sounds pretty grim. But there is hope. The best solution is for Generation X to avoid new debt and pay off old debt as aggressively as possible, and for Generation Y to avoid the debt trap at all costs. It would be wise to put off credit card use at least until entering the workforce and becoming more familiar with personal finance, basic budgeting and personal accounting.
The young who are able to invest for retirement, rather than simply service their debts, will be in the best position for financial success. Invest what you can now, even as little as $100 a month will likely return huge dividends when you retire.
A basic understanding of personal finance, debt management, budget management and accounting will go a long way toward helping you avoid the debt trap. Learn how to manage your money and you may even leave a legacy for those generations to come.
Mint Tip: Pay your credit cards in full each month:
The average American carries $8,500 in credit card debt. At a minimum payment of $100/mo, it takes 6.7 years, and $4,257 in finance charges before you’re in the clear.
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18 Comments so far
leave a commentIt does take a while to notice how one is not moving ahead.
I found the book, “All your worth” very good in dealing with issues for the typical working person including keeping expense management simple, handling debt, etc.
Some details on a writeup I did
http://blog.rajgad.com/work/2008-08/lesson-from-the-book-all-your-worth-must-haves-50-wants-30-savings-20.html
or
http://tinyurl.com/57gdlx
Amit
I’m 26 now and have about $6K riding in credit card debt, but the truth is that I was great at managing my money until I tried to get into the work force.
I had well-paying summer internships as a web developer before and during my first year of college so while I had a credit card I made sure to pay it off immediately. I really only had it so I could make purchases online.
However college turned out to not be the right thing for me and I dropped out after my second year, but finding technology related jobs in the state I live in was difficult at the time (and most other low income jobs were snapped up quite quickly). I ended up living with my parents and my girlfriend’s parents and I built up my first $1000 of credit card debt the first summer I was unemployed.
I worked to continue paying it off and almost had, but it’s been downhill since then. I know how to create a budget, but it’s hard to spend less than I earn during these trying financial times. It’s definitely a heavy burden to carry.
I like the Mint Tip. The debtors will have an idea how long it will take them to pay off their debt. So perhaps this will spur them into not accumulating credit card debt as it is the most expensive loan there is. You’re right; the situation is grim but still doable.
Evelyn Guzman
Debt Challenger
I totally agree. This generation has its priorities very very askew. My biggest pet peeve is the collective mantra that “I’m worth it.” There’s this sense of entitlement that is rampant. I ranted about it recently in a post called “Most of us aren’t worth it.” (http://ipickuppennies.blogspot.com/2008/09/most-of-us-arent-worth-it.html)
im bad with credit cards
I use to shop with my credit cards but now I have to pay
O ar im bad with visa ar webmaster cards
Maria- one thing that many of us are tired of is people trying to distinguish between “good debt” and “bad debt”. The truth is that enormous volumes of good debt (eg school loans, mortgages) will handcuff you from paying off bad debt. An emerging trend that I’m hearing about is buying less house than you think you might need in order to have the resources to minimize your total debt and have the opportunity to invest when sound opportunities present themselves.
I have been wrestling with my CC debt ever since I graduated. In July 2006 I finished undergrad with about 3.5 K in cc debt. I said I was going to stop using my cards then. I have gone as high as 7k since then and back down to 1k as well. It has fluctuated up and down since then and I have yet to get down to 0 and be able to keep it at 0. Why you ask? A great question that I struggle to answer, but I have no CC’s in my possession any more and knocking it out month by month. But your right, it took me forever to realize it. Learn from my mitakes.
Very informative article! Credit card debt is growing in both the US and UK, there are debt solutions though and it always makes sense to get professional financial advice when dealing with your debt.
Umm, check that calculation at the end:
“Mint Tip: Pay your credit cards in full each month:
The average American carries $8,500 in credit card debt. At a minimum payment of $100/mo, it takes 6.7 years, and $4,257 in finance charges before you’re in the clear.”
6.7 years is about 80 months. 80 months at $100 per month is $8000, which isn’t even enough to pay off the principal, let alone $4257 in interest. Not to mention that as the balance is paid off, the minimum payment gets lower. On a balance like that, making the minimum payment should clear the balance in about 20 years. Yep, 20.
Really informative article. Keep it up.
Nice article Mary, thanks for this
Paying down your debt is key as there is no better, “last resort,” safety net than a handy credit card when times are tough.
“So with all that money going to iPhones, PSPs, and the latest designer duds, is this generation just plain spoiled?” Yes. As a 27-year-old grad student I can tell you that my generation is spoiled. We have more consumer options than any generation before us and that usually leads to overspending on stuff we don’t need. No one actually NEEDS an iPod and very few people need a cell phone, but we have convinced ourselves that we can’t live without luxury items.
Me and my girlfriend are 25 both graduated with Masters with almost a 30K loan 1.5 years back. Today its only 7k more and I have zero credit card debt. I should be able to clear it off in the next two months. As an Indian, I really don’t understand debt how can one be in debt if they are earning? I have an iPhone, car, $1300 cam, I spend over $1000 on travel each month and I regularly eat out. May be I just starting but I have a feeling that I will never ever be in debt unless I start a company or something. WWAID – he never gets into debt.
Satyajit,
You must be one of the lucky ones. I am just finishing undergrad and have about 4,500 in CC debt along with a few thousand in student loans. I have cut back to eating about once a day when I can because of my debt. I DO have a job, but am not able to work enough because of school to pay for my living expenses. I am earning, but I do not earn enough. I’m not quite sure what I will be doing about all this debt when I graduate in a few weeks. I have not been able to find a “real job” because of the horrible economic times. The credit card helps me get by and hopefully I will get hired and can start paying it off.
bragging? REALLY!? this should be a forum to help and encourage people, not a forum for you to list the particulars of a relatively opulent lifestyle.
you spend more on travel each month than i spend on rent. some people simply don’t earn what you do. but if earning what you do turns one into a self-satisfied braggart, perhaps it’s not something to which one should aspire.
Aside from the fact that many 20-somethings don’t understand the implications of credit card debt until it’s too late (I was one of those people myself), the way corporations push consumerism on people is a huge factor.
Every time you pick up a magazine or turn on the TV, you’re getting swamped with ads and product placement brainwashing you into thinking you have to have all these things.
If more people would just realize that they don’t need to BUY EVERYTHING, we would have less debt, less waste and less consumerism all around. BorrowMe.com is an online marketplace that is trying to tackle some of these issues head on by allowing people to borrow anything from anybody.
Why should you buy something you’re only going to use a few times when you can borrow the exact item from a friend or neighbor who’s not using it? Why pay full price for something when the guy up the road is selling his for half the price?