Credit Crunch: A look at mounting consumer debt
Going for Broke: Making it harder to declare bankrupcy
Lesson Plans for Teachers:
Sixteen-year-old Sasha, is juggling a number of purchases from her recent run through the Pentagon City Mall in Northern Virginia. She is not, however, juggling any credit cards. Not yet.
"I know there are credit cards out there for me, for someone sixteen. My friend was offered one in the mail and I've seen ads on the Internet, but I don't think my parents want me to have one," she said, holding up a brand new pair of red jeans she just bought.
"I'm already in trouble for borrowing next month's allowance in advance."
Sasha, like other shoppers under 18, dreams of the day when she can carry America's ultimate Monopoly money, the credit card-- and new rules may soon make that easier.
Credit cards have become common in most Americans' lives. In 1980, 56 percent of American adults had at least one credit card. Now, that number has grown to 76 percent. Accessing credit has gotten easier for everyone.
Credit card companies want more American spenders, and they lure through with mailings, television commercials, the Internet or booths in malls and colleges. In fact, the average household receives eight card offers each month.
People have all come to rely on credit cards for a wide range of purchases as more places, like movie theaters, fast food restaurants and online stores, accept them for payment.
Last year, Americans charged more than $1 trillion ($1,000,000,000) in purchases with their cards alone. As Robert Manning, author of a book called Credit Card Nation, states, "We're looking at a generation that's been told that immediate gratification, the 'just do it' consumption culture is the real new school."
According to the Federal Reserve, Americans are spending exactly what they are earning, which means that most families are not saving any money and most are going into debt to afford the lifestyle they want to live. Five years ago, families saved 5% of their income each year but on average they now save nothing.
Sasha puts it this way: "Plastic makes it easy." If spending is your hobby and you have access to a card, why not cash in with one, like Citibank/Sony's, claiming to be "the currency of fun?"
Well, as with most things that come too easy, there's a catch. Credit equals debt.
A nation of debtors
How are credit cards and debt related? And why does America have a culture of debt?
At the end of 2000 our household debt was 7.2 trillion dollars.
Debt is what you
create from a credit transaction and are obligated to pay back. For
many Americans today, and a growing number of teens, having debt means
borrowing from the future in an attempt to live better in the present.
Sasha, for example, is in debt to her
parents. She didn't have the money to get those red jeans and so she
borrowed against her future allowance.
America has almost always been a culture of consumption. Americans like to spend. We became a credit society at first because we needed money to build our country and produce goods. In order to get the money, many people needed credit to borrow. Once credit was created and more available, people began borrowing for luxury goods.
Americans defined themselves by what they had and owned. In the 19th century, for example, people began to buy middle class status symbols such as cars, pianos and sewing machines on installment plans, borrowing plans in which you pay a small amount each month.
The catch is, you end up paying more on an installment plan than you would have paid if you paid for it all up front.
While Americans have historically been eager to borrow, they also attach a greater stigma to debt. Debt was a powerful motivator used to make people work harder and be more efficient.
In colonial times, if a debtor failed to surrender their possessions to pay their debt, they were taken to prison. Uncooperative debtors could have an ear cut off or even be executed.
Clearly, the Americans who now hold a record-breaking $675 billion in outstanding credit card balances will not be executed. In the worst cases, some may have their cars or homes repossessed.
Usually people who fall behind on paying back what they owe are penalized on their credit report - their financial permanent record. Once one credit card company or bank puts a red flag on their record, it makes any other financial institution reluctant to lend. In other words, if you fall behind on your credit card now, it makes it harder to get a loan for a house or car later.
Americans who are severely in debt can declare bankruptcy. Declaring bankruptcy protects them from creditors and gives them time to pay off most of their debt. However, getting that legal protection may be more difficult for debtors in the near future. Congress is currently changing bankruptcy law to make it harder to escape paying debts.
Although credit and debt can be linked to financial problems, they're neither good nor bad in their own right. It is the overuse and abuse of credit and debt, many times due to inexperience and lack of financial education, that leads to trouble.
Americans abuse credit so much that by the end of 2000, our total household debt was 7.2 trillion dollars. American families owed 100% of the money they earned from work. So, many families go into deep bankruptcy to live the lifestyle they are used to.
"Debt is an accepted and inevitable feature to enhance one's lifestyle," said Manning in Credit Card Nation. "The key is here, as the marketing of consumption goes younger and younger and younger, we're talking about people who have never had jobs and haven't had to establish a budget."
More young people are in debt than ever, and most don't understand how serious debt can become. Increased access to credit cards certainly isn't helping.
America's most wanted
So, what has changed for teens? Why all the credit cards and debt?
One answer is aggressive credit card marketing. Companies are now targeting teens, the most vulnerable and profitable, untapped age group. Teens spend a lot, about $100 a week each and $141 billion a year all together, on fast food, clothing, movies and CDs.
In the past, many teens could not get a card because they had no credit history and little or no income. Being under 18, teens could not independently enter into a credit card contract, they had to be co-signed by a parent.
But that is all changing.
Although you still have to be 18 to apply for standard credit cards without a co-signer, companies are now aiming cards with built-in parental controls specifically at teens.
Companies want their card to be the first one in teens' hands as industry research shows that young consumers remain loyal to their first cards as they get older. A study of college students last year found that 22 percent had owned a credit card in high school, double the 1994 estimate of 11 percent.
Studies of teens just starting college have been the most alarming. A 1999 Consumer Federation of America study found that 70 percent of undergraduates have at least one credit card and the average debt is $2,000. That fact coupled with last year's 50 percent rise - to 120,000 - in the number of bankruptcies among people under 25 illustrates a growing problem.
Aggressive marketing, coupled with students' lack of financial experience or education, leads many students into serious debt. Teens and students have a lot of money to spend, but little knowledge of basic financial information. As a result, they fall into a credit card trap. They spend more than they can repay and the debt quickly increases.
Should teens be able to use credit cards?
It may be dangerous to give teens credit they can't handle, but a credit card can be a valuable tool, if used wisely. Credit cards can be a good way for students to establish their credit history early and develop their own financial freedom.
But on a test of personal finance skill administered to high school seniors, students averaged of a score of 57, an F on most grade scales. Only 5 percent got a C or better. Two-thirds of students between 16 and 22 admitted they should know more about money management.
How much do you know about managing your own finances? Get started with the links to the left.
What do you think? Do you feel secure about your financial future? If your parents gave you a credit card, do you think you could use it wisely?
-Contributed by Jenny Nelson
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