By Hon. John C. Ninfo, II
4 February 2005

YOUNG MONEY asked Judge John Ninfo, founder of the Credit Abuse Resistance Education program,to list some simple credit management tips for young adults. This article is the first installment of a two part series featuring his eight rules for debt-free living. Click here to read Part II.

There are more than 1.5 million bankruptcies filed each year in this country. What is more alarming is that in the last 10 years the average credit card debt, a major cause of those bankruptcies, is up 152% and bankruptcy filings among young people between the ages of 18 and 25 have increased 96%. Robert Manning, an international expert on consumer credit and the author of "The Credit Card Nation," recently estimated that between 7% and 10% of college students drop out of school because of consumer debt issues.

I founded the Credit Abuse Resistance Education (CARE) program, which makes bankruptcy professionals available nationwide to high schools and colleges in 23 states, to help students understand the advantages of avoiding credit card debt. After more than 30 years in and around the bankruptcy court, the last 13 years as a bankruptcy judge, I would like to share some insights with you.

Hopefully they will help you to avoid becoming one of these statistics or suffering some of the many other increasingly severe and numerous consequences being experienced by young people who have abused credit cards. These other consequences include being turned down for student loans, admission to graduate school, jobs, apartments and car loans.

1. Credit cards (they used to be referred to as "charge" cards) are not new money, more money or free money. You should think of them just as a more convenient way, especially for larger purchases, to spend the money that you already have. If you do, you will realize that you only need one major credit card with no annual fee that you can use to buy or do things that you can pay for when the bill comes in at the end of the month. You don’t need all of those department store cards because studies show that you will spend more in the store if you have one.

Forty percent of credit card users in this country pay their balance off every month (referred to in the credit card industry as "deadbeats," which is the world upside down if you think about it for a moment), and the other 60% carry average balances estimated to be between $12,000 and $14,000. Be a "deadbeat" and be proud of it. You won’t regret it in the long run.

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2. Even though we are becoming a "plastic society," don’t completely buy into that mentality. Use cash for everyday purchases of less than $10 or $20 and when buying things that you can eat or drink. You will find that you make very different spending decisions when you use cash, a check or your debit card, especially when you make a ledger entry every time you use a check or your debit card so that you can see your account balance reducing. When McDonald’s allowed customers to use credit cards, the average sale went from $4.50 to $7. Need I say more?

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3. Think about what you spend your money on, instead of being on "spending automatic pilot." Are you trying to maintain the lifestyle that you had at home, when your parents were paying for your needs and many of your "wants," or to keep up with your new more wealthy college friends or friends who are willing to go into credit card debt to live a lifestyle that they can’t afford? That is what most college students say got them into trouble with credit cards.

Do you really need those expensive lattes twice a day, all that college logo clothing and to be lending money to your friends or picking up the tab for their food and drinks when they don’t have the money? How many times have they actually paid you back?

Take the time to create a realistic budget (spending plan) that you can stick to. It should be a plan that is first based upon your real "needs" and then your "wants," if you can afford them. Remember that your budget must have a savings component built into it, not only for true emergencies, but also for life’s inevitable expenses that pop up from time to time and for your future (having a late night pizza delivered because you are studying for an exam and are hungry is not an emergency).

When you put your spending plan together, think about ways that as a college student you can save money. Instead of always going to first run movies, wait a month and see the same movie at a discount theater, buy some things in bulk at a discount store or club, take advantage of the many free things around campus and check around for the cheapest gas prices.

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4. The average college student graduates today with nearly $3,000 in credit card debt. Many have double or triple that amount, and they are paying average interest rates of between 18% and 24%, notwithstanding all of the low introductory and teaser rates that you may see advertised. At 20% interest that means $600 a year in interest that you must pay just for the privilege of still owing $3,000. That totals 100 hours (two and one-half weeks) of work at that $6 per hour summer or after school job that you don’t like much to begin with.

In addition, the credit card industry now derives 35% of its revenues from fees, which can be as high as $39 (annual fees, over limit fees, late payment fees, balance transfer fees, fees for paying online or by phone and more). One day late in paying your $50 credit card balance and you could pay a $39 late fee (that’s six hours worth of work). It has been said that the credit card companies have armies of attorneys and MBAs charged with finding new ways to make money by charging you fees or raising your interest rate.

The Wall Street Journal recently noted that credit cards are a minefield for the consumer. If you have one credit card, only use it to charge things that you can pay for at the end of the month when the bill comes, and pay that bill on time, you can avoid paying those fees and that exorbitant interest, which can result in you paying double or triple for your purchases and having less money to spend on other things.

You will also avoid the many consequences of abusing credit card debt, such as being turned down for a job or a student loan. Everyone today is pulling credit checks on applicants. Since they know that the studies show that individuals with significant credit card debt don’t perform as well at work or at school, and in the opinion of many, incurring credit card debt that you can’t readily pay back shows poor judgment, they often feel that other equally qualified debt-free applicants are a better risk. Good jobs are too hard to come by to lose out on one because of credit card debt.

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5. If you pay your credit card balance off on time every month, you can receive a free loan for between 30 and 50 days. However, if you carry a balance you will pay interest on everything that you charge from the moment that you charge it. If you do have a balance on your credit card, resolve to pay it off as quickly as possible, in no more than three months, remembering that what you should never do is miss a payment or pay only the minimum payment or less than the actual interest due.

If you pay only the minimum payments on a $1,000 balance, even if you don’t charge anything more, at 18% interest it will take you more than 12 years to pay off the balance and it will cost you an additional $1,115, so you will pay more than twice as much for what you charged. That is because you will be paying interest on interest that can accumulate very quickly. What could have been worth paying more than double for it?

Would you go on that $1,500 spring break trip to Cancun if you knew that it was going to end up costing you more than $3,000? Through its advertising, the credit card industry has been successful in making people focus on their "wants," whether they can afford them or not, and then giving them permission to have what they "want," "just buy it" because you can by using a credit card.

Then, by focusing people on the payment required to simply maintain their resulting debt, rather than on how difficult it would be to repay that debt within a reasonable time, the credit industry has relieved the consumer of the anxiety that otherwise comes with being in debt. "If I can afford the payment, I must be able to afford the debt." How many times have I heard that? It is simply not true.

Affording debt is being able to borrow it and pay it back over a reasonable period of time with interest out of your disposable income, not by incurring more debt. So please, scrutinize all of that advertising. (This goes for car loans too. How much are you really paying for a car when you have a five- or seven-year loan?) What are the real messages they are giving you and the rest of the public? As a "deadbeat" I am offended by it. You should be too.

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6. Don’t accept all of those solicitations to sign up for a credit card in order to get a free gift. Your ability to get credit in the future for the things that you will really want, like a car loan, a home mortgage or a business will be much more difficult if you have multiple credit card accounts and credit inquiries. Even if those accounts have no balance due on them, and even if you have never used the card, the credit issuer knows that they still represent the availability of credit, and that you could max them out the next day and suddenly be deeply in debt.

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7. Overspending and living above your means with credit cards by buying things that you "want" but can’t afford, are habit-forming and ultimately for many it is addictive. Going on a "financial diet," when hard times come or that high paying job doesn’t materialize after college, is much more difficult than a regular diet, and we all know how successful most people are with dieting.

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8. Check out the CARE Program website in order to improve your Financial IQ. You will find the Credit Card Chronicles (written by college students), articles, links to other important financial websites, a recommended book list and other great materials, such as the "Real Cost of Credit" handout that contains many lessons, tactics and techniques to help you understand the disadvantages of living a credit card debt-filled life and how to avoid it.

A credit card debt-free life will improve your chances of getting the important credit at good rates you may want someday, for a home, car or business, educating your children, paying for your rising health care costs and retiring with dignity. These things may seem like they are a long way off, but now is the time to learn about and take control of your finances. With the deregulation of the credit industry, no one is looking out for you except you. Your credit is like your reputation, a good one will always help you, but once you have lost it, it is very hard to get it back.

© 2005 Credit Abuse Resistance Education