Sunday, May 24, 2015

Monday is for Money: The Reality of Debt - Credit Card Style

Do you remember getting your first credit card?

I sure as heck do. It was a big deal. I went to the bank with my Auntie just as I was getting ready to go off to college. I recall sitting at the desk of the advisor talking through what it means to have a credit card. I believe my initial limit was something like $500 or $1000. Two reasons were given for why I should have a card at this point in my life.
  1. It's for emergencies.
  2. Gots to build up that credit.
This all made sense to me at the time. Looking back, though, these two reasons for getting a credit card seem to conflict. In order to build up credit, one of the fastest ways is to use a credit card. However, it requires frequent use of your credit. This flies smack dab in the face of "It's just for emergencies" logic, which, by definition, shouldn't happen often. In these cases, credit is used as a last resort. In other words, using a credit card for emergencies is a defensive approach while using it for building credit is an offensive approach. One is going to give way to the other.

And we all know which one prevails.

Credit cards are just one example of how many Americans, especially young adults my age, are bogged down by "that which shall not be named," but will be named because otherwise this makes no sense: debt. Go ahead and Google "debt statistics for young adults" and you will see article after article about the reality of debt the average young adult carries. In a sense this reflects my sentiment above; young adults don't want to call debt what it is and what it actually means for them. Instead, there's an avoidance of the reality and a postponing of taking real responsibility. Perhaps it's a misunderstanding, so I should take some time to explain what debt is.

In the simplest terms I know, debt is the result of asking for money from a person or institution, receiving that money, and then using that money to pay another person or institution. The most basic example is asking for $5 from a friend to get some grub at McDonald's. Technically speaking, you are indebted to your friend. Now, she can forgive your debt by saying, "it's not a big deal, just take it," but unless that is what your friend says, you owe her $5 (and you best pay up!). Beyond that, it gets a bit more complicated because lending institutions, such as banks, make their money on a little something called interest. Interest tends to be a percentage on top of the money loaned. Here's another example. Say I'm willing to loan you $100 so you can buy that pair of jeans that's on sale (this may not be the best example as buying a pair of jeans on sale for $100 is crazy to me), but state that in order for you to receive the money, you must pay me back with 5% interest. So not only do you have to pay me back the $100, but you owe me an additional $5, meaning you have to figure out a way to get that extra $5 and I made an easy $5 just because I had $100 when you didn't. Bottom line: Those jeans you bought for $100 really cost you $105.

And that's how the credit card companies get you.

Here's an exercise: look around your apartment or home and consider the last big purchase you made with a credit card. Then ask yourself how long it took you to pay it off. If you were unable to pay off the debt that same month, take into account the interest you had to pay on top of the original purchase price.

I'm just scratching the surface on debt here, but it's important to get the basic idea down. My hope is that your eyes will begin to open slowly (or super quickly!) to this powerful, but true, maxim: The debtor is slave to the lender.

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