With Eldest leaving for college inside of six months, the nascent-adult mail has started to flow and one of the pieces to her the other day was a credit card application from First Financial Bank USA. The bank is a credit card provider that specializes in credit for college students and touts itself as a leading quality provider of credit for new credit users. Inside the envelope was a letter to the kids, a separate note to parents and a sticker sheet showing all of the options available to personalize the front of the student’s new card and the obvious message is that it’s a great time to get your first credit card so that you can learn to manage credit and build your infant credit history.
But is it really a great time to do that?
What bothers me about the continued marketing of credit to our young people is that it’s a recipe for life in an economy requiring a completely different mindset than before. You need to understand something about the credit explosion of the past sixty years – it lubricated and accelerated the shift in our economy from an industrial spending base to a consumer spending base. At the end of the Second World War, government and business leaders were at a crossroads and knew that signficant changes had to be made in the economic drivers. From the Industrial Revolution until the Great Depression, economic growth had been predicated upon capital investment spending by business as the country grew and was developed. That spending utterly collapsed in the Depression and despite the best efforts by FDR to get liquidity into the system via government spending, a traumatized American consumer literally threw the money into the mattress as protection for any further problems.
At the end of WWII, the public debt was stretched by payment for the war effort and the government wasn’t seen as a viable alternative for economic growth and all eyes turned to the American Consumer to lead the way out. The birth of the modern credit card – Diner’s Club – led to a realization that available consumer credit was a great way for the average American to lever his growing income into spending that could reshape the economy. The fact that the US government allowed individuals to deduct their credit card interest from their income taxes until the mid 1980s was proof positive that consumer credit was a policy tool to push spending. But we’re now at the point at which families not only have to delever – pay off the debts – but learn to live within their means and relearn that they themselves are the ones responsible for their own retirement and future; this is all within the framework of lessened income growth.
I’ll admit that the marketing to college students, the majority of whom now have their own credit cards, is better than it was. Prior to the passage of the CARD (Credit Card Accountability, Responsibility and Disclosure) Act of 2009, card issuers enticed students to their cards with such freebies as mugs, frisbees and t-shirts and the kids lapped it up; it was only after they began to receive the bills that they realized what they were in for. Colleges that permit marketing to students on campus are obligated to certain requirements and the shiny bangles that captured the attention of the previous generation of students are now gone. The CARD Act of 2009 went some way to cleaning up certain wild-west aspects of the retail credit industry. On the offering side, it did end the superficial bangle show that captured the fancy of many young adults. On the billing side, it also mandated that bills sent to cardholders show such things as the length of time required to pay off the amount owed if only the minimum amount was paid. This particular aspect alone was eye-opening for new users as they realized that making only the monthly minimum was a long-term financial hemorrhage.
One of the lines sold to the American consumer is that credit is simply another form of liquidity and that if you don’t have the money now, just use the plastic and pay it off later. The problem is that the liquidity isn’t yours but someone else’s and that someone will demand repayment. This is particularly hazy to the youngsters who haven’t the experience to fully comprehend this and are generally flush with the new-found personal and financial freedom that comes with college.
In the case of the offer to Eldest, the only thing that we had to do was show her the APR of 29% and she immediately blanched. It wasn’t necessary to show her the misleading commentary nor take her to cardoffers.com, a website that offers side-by-side comparisons of the various cards available as well as cardholder comments critiquing their card. In the case of First Financial Bank USA, there were more than 130 comments and the majority were strongly negative. When it finally becomes time for Eldest to consider a card, then we’ll go to that site and parse through the card language to better understand the product. For now however, she’s best served going through at least part of college without a credit card. She’ll be forced to manage her cash and even learn to do without and if she’s pressed, her mother and I are only a phone call away.