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Young and in Debt
New
consumers embrace, use credit like no generation before
By Margaret Webb Pressler - THE WASHINGTON POST (As seen on MSN. Com)
Dec. 7 — Christopher Siwy thinks he’s pretty
good with his finances, especially for a 23-year-old. Siwy
just moved to
Old
Town
from
Allentown
,
Pa., and with a starting job in information technology, he has no problem
paying $160 on his student loan every month. He
even saves a little bit out of each paycheck so that someday he can buy a
condo.
But when Siwy wanted some wheels, he turned to the
most popular financing plan for someone his age: a credit card. He
put a new $7,000 motorcycle on a credit card with no interest for a year,
and he plans to pay it off before the year runs out. But
if he can’t, he says, he’ll switch it to another interest-free credit
card.
“I had to have a motorcycle,” he said with a grin.
Siwy is part of a generation of consumers who have embraced and used debt
in a way that no generation has before. The
polar opposite of the postwar generation, which feared debt, today’s
young adults view credit cards as a welcome and easy path to the lifestyle
they see around them.
“What’s extraordinary is how quickly it’s changed,” said Robert D.
Manning, a professor at the
Rochester Institute of Technology and author of “Credit Card Nation.”
“Now credit is an entitlement — it’s not connected to having a job
and being a producer and understanding how much debt one can afford.”
Financial experts are alarmed about this carefree use of plastic because
the debts that many twentysomethings are incurring are stacked on top of
towering levels of student loans. Yet
these young consumers often seem oblivious to the harm that could follow
the spending they’re doing today.
Elizabeth Warren, a
Harvard
Law
School
professor and co-author of the new book “The Two-Income Trap,” said
the comeuppance could be severe. Most
people who file for bankruptcy protection in their late twenties and early
thirties, she said, “are people who got into trouble back in their late
teens, but have rocked along making minimum payments, falling a little
behind, often denying to themselves how much financial trouble they’re
in.”
THE TUITION TRAP
The
biggest factor pushing up the amount of debt carried by young adults is
student loans, which have skyrocketed along with college tuition. According
to a study done last year by Nellie Mae, the student-loan financier based
in
Braintree
,
Mass.
, the typical student graduating from a four-year college has close to
$19,000 in student loans. Just
five years earlier the average was $11,400.
“It’s a pretty substantial jump,” said Marie
T. O’Malley, vice president
of marketing for Nellie Mae.
But on top of those low-interest loans, young adults increasingly leave
school with substantial credit card debt. In
the 1990s, financial markets became more sophisticated and better able to
manage the risk of consumers whose creditworthiness wasn’t obvious. The
result was that credit card companies started aggressively courting
nontraditional customers, including college students. They
put sign-up tables at universities and used various enticements to lure
these young new consumers.
“They’d say, ‘Come on, if you sign up for this credit card, I’ll
give you a free gift,’ ” said Latouri Mayo, 26, recalling her
experience as a student at the
University
of
Maryland
at
College Park
. Mayo ended up with a
Discover card with a $1,500 limit and a Visa with a $500 limit, which she
soon filled up. Then she
couldn’t afford her payments.
Mayo finally paid the cards off two years ago and now, working for a labor
union downtown, she’s hoping her good payment record on her car loan
will help repair the damage she did to her credit rating.
Nellie Mae’s credit checks on student loan recipients showed that in
2002, 83 percent of college students held credit cards, compared with 67
percent in 1998. The average
student’s balance was $2,327 in 2001, up 24 percent from the average
balance of $1,879 in 1998. The
average graduating senior carried credit card debt of $3,300.
Credit card use appears to be drifting even younger. RIT
professor Manning said his research shows the use of credit cards among
high school students has tripled in the past two years.
The big problem experts see with all these free-flowing credit cards is
that young consumers often don’t make the connection between their
spending and their financial resources. While
the rising debt from student loans is a direct result of increasing
tuition bills, the growth in credit card debt is about instant
gratification and the inability to live within one’s means. People
used to use layaway; now they just charge it.
“A part of the social aspect of the problem is the desire to be able to
consume the way you see others consuming, irrespective of your income,”
said Douglas G. Duncan, chief
economist of the Mortgage Bankers Association. “It’s
hard to say, ‘Well, instead of buying my clothes at Abercrombie, I’m
going to get them at Wal-Mart. It
doesn’t carry the status, but it’s prudent.’ ”
Duncan
likens the financial outlook of many young adults to the 30-minute sitcom,
where crises bubble up, boil over and cool down in a matter of 22 minutes
and a few commercial breaks. Younger
consumers not only think they should be able to live like the characters
on “Friends,” with the nice apartment, good clothes and dinners out,
but they seem to think their problems will resolve themselves just as
easily and quickly.
“It shortens our belief about how long it takes to acquire certain
things,” he said. And that
perspective was only reinforced by nearly a decade of economic growth in
the 1990s. Students who
graduated in that decade never experienced the uncertainty of previous
generations, of getting out of school and not being able to find a job.
That made consumers in their twenties more vulnerable to the messages
urging people to spend spend spend.
“There are things you can do that are fun and that are cheap, but
we’ve forgotten about them,”
Duncan
said.
TEMPTATION EVERYWHERE
It’s not that young consumers don’t know
they’re in a bit of a bind. But
many just assume they’ll eventually have the money to pay their bills.
“It’s embarrassing to ask your parents for money,” said Audrey
Waters, 23, an editorial assistant at the Wall Street Journal who said she
had just paid the minimum balance on one of two credit cards she’s maxed
out. “I have a good job. I
make decent money, and I still can’t make ends meet.”
The idea of adjusting her lifestyle to her income doesn’t seem to have
occurred to her. Waters may be
out of credit — she jokes that she has no idea how she’s going to pay
for Christmas — but she isn’t rushing to change her spending habits. Waters
said she moved to
Washington
from
Savannah
,
Ga.
, to “live it up,” and after working hard all week, she wants to go
out for drinks and dinner, to concerts and shopping for nice clothes.
Then again, at least Waters has friends who are looking out for her. She
said she got three more credit card offers in the mail recently, and
though she considered using one so she could go to
New York
before Christmas, she ended up throwing them all away. “My
friends talked me out of it,” she said, rolling her eyes.
Of course, young adults have always been impressionable and eager to
imitate the lifestyles around them. But
just a generation ago, credit had to be earned.
“We were no better than the kids nowadays, but it was much more
difficult to get into trouble,” said Lewis Mandell, a professor of
finance at the State University of New York at
Buffalo
who has written numerous books on consumer finance.
It’s typical of consumers who get into trouble to say they don’t know
how they got there, and that’s especially true of younger adults, who
often can’t remember what they spent all that money on. Yet
they can spend with abandon for longer now, because credit card companies
will let customers get much deeper in the hole before they shut off
credit.
At the Consumer Credit Counseling Service of Southern New England, for
example, clients a few years ago were typically several thousand dollars
in debt and had nowhere else to turn. Now,
many people seeking help have been able to rack up $12,000 to $15,000 in
credit card debts before running out of options.
One reason it goes so far is there’s little stigma about being in debt
among young adults. Groups of
twentysomethings will go out drinking and joke about the credit card
payments they can’t make. “We
egg each other on and encourage each other, like, ‘Come on, you can just
make the minimum payment,’ ” Waters said. “We
talk about it all the time.”
Though bankruptcy filings among 18- to 24-year-olds have been rising —
doubling in the 1990s — they still represent just 3 to 4 percent of all
personal bankruptcy filings. The
bigger risk for this age group comes in the next stage of life, which
brings suddenly higher bills.
Two young single professionals might get married; find themselves with a
house, a couple of cars on credit, continuing student loan payments and
every penny of their income committed every month. They
get by, but they have no room for life-altering events that could push
them over the financial edge, such as pregnancy, job loss or severe
illness.
“If you’re maxed out on your debt, you have nowhere to run, no
savings, no additional capacity to borrow and you’re cooked,” Mandell
said. “This is the real
problem of being young and in debt.”
FIXING THE PROBLEM
There has been a concerted effort by financial
counseling organizations to educate consumers about debt and how to manage
it. Clearly, there is a lot to
teach. A recent survey by
Myvesta, a Rockville-based financial education firm, showed that 64
percent of consumers ages 18 to 24 don’t even know the interest rates
they pay on their credit cards. Others
don’t understand that it can take decades to pay off a $3,000 credit
card balance if you pay only the minimum each month.
Some colleges are starting to offer financial education classes, and
nonprofit organizations like JumpStart of Washington are pushing for
improved personal financial literacy in the nation’s schools. Nonprofit
credit counseling programs, too, perform a number of outreach programs to
reach people before they get into trouble.
But how do you teach restraint?
“Simply going through financial education doesn’t necessarily make you
smarter and better able to handle money — it makes you more confident
that you know what you’re doing,” said Steve Rhode, president of
Myvesta. “Children
especially learn more from watching their parents, from the media, from
friends and from experiences.”
Indeed, twentysomethings who have no credit card debt and are living well
within their means are likely to say they learned it from their parents. Adrienne
Coyle, 22, works for the American Bankers Association in
Washington
, but that’s not why she religiously avoids credit card debt. It’s
because her father drummed it into her starting in high school that credit
cards should only be used if you have the cash in the bank to pay the
bill.
Coyle became so wary of credit card debt that her father had to persuade
her to get a card just to build up her credit. “I
have one credit card, I put one thing on it a month and I pay it off,”
she said.
But not all parents have the same influence. And
it’s those kids who may have to learn their financial lessons the hard
way.
Laura Bacari, 23, said she figures she got her spending habits from her
mother, who “likes to shop.” Right now Bacari is a paid intern at an
international foundation and struggles to make payments on $10,000 in
credit card debt that she amassed at
George
Mason
University
, buying things like “clothes, shoes, books for school.” Soon, she
will have to start paying $174 a month, as well, on $20,000 in student
loans.
Right now, Bacari can’t afford to move out of her parents’ house in
Virginia
, but she sees herself in the future as someone with no debt who pays her
bills in full every month. She
thinks she knows how to get there.
“The plan for me is to get a job that pays more money, and start paying
more than the minimum,” she said. “I
think I’ve matured a lot.”
Staff writer Steven Gray contributed to this report.
© 2003 The Washington Post
Company
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