Don't Learn Your Credit Card Lesson the Hard Way

by John Kiernan on February 4, 2011

credit-lessonI received an e-mail just the other day from a nice woman living in Milwaukee, Wisconsin (Go Pack!) who wanted advice about efficiently improving credit standing. You see, her son was a senior in college and had opened a 0% APR credit card because he thought it sounded too good to pass up. He then proceeded to rack up charges which he could not pay for. However, instead of telling his parents about his credit card debt and asking for help, he just ignored the situation, hoping it would go away. After all, he was just a kid and could probably say “I’m sorry, I didn’t know any better,” and all would be forgiven, right? Well, that seemed to be the case for a couple weeks until more and more letters started coming from his issuer using words like “past due” and “account suspended.”

At this point, the young man (whom we’ll call Sean) finally consulted his parents. “What should I do?” he wondered. They told him that he needed to become current on his bill in order to avoid falling deeper into delinquency and incurring more significant credit score damage. Since Sean didn’t have much money of his own, his parents loaned him the cash, effectively closing the account, under the condition that he find a job at school so that he could pay them back.

Still, they realized that he needed to improve his credit. They knew that delinquency can damage one’s credit score and that a good credit score is needed to take out an auto loan, get a mortgage or even be seriously considered for some jobs. So, not wanting their son to be disadvantaged later in life, they decided to take a proactive approach and act now to rebuild Sean’s credit. The only problem was they didn’t know how to go about doing so.

That’s where I came in. I first explained to Sean’s mother that the damage her son had incurred was significant because his credit history was extremely limited and was now mostly filled with negative information. In order to rectify this he needed to dilute this negative information with a pattern of positive usage. The easiest way to accomplish this would be to get a secured card. I told her that all Sean needed to do was place a security deposit of around $200 to open the card, lock it away in a drawer, and add to the deposit over time to increase his available credit.

Since much of fiscal responsibility is about what someone chooses not to do with his money, actually using a credit card wouldn’t be necessary. By merely maintaining an open credit card at zero balance, Sean would be supplying his credit reports on a monthly basis with information showing first and foremost that he is in good standing but also that he has 0% credit utilization and plenty of available credit.

While Sean’s financial life will be fine, there are various lessons that can be learned from his situation. First, it’s not a great idea to open a credit card on a whim. Not only does this prevent you from researching a card properly before opening it, but your credit score also takes a slight hit that lasts about 6 months each time you open a new card. While this wouldn’t significantly affect a college kid, it could make it difficult for someone older to get a loan, for example.

Secondly, the worst thing you can do when faced with debt is ignore it. It will simply grow more costly because of interest and become more and more complicated to deal with over time. Debt won’t go away unless you make it, so don’t run from financial problems, address them.

This advice holds true no matter your age. However and perhaps most importantly, it’s become common for kids to simply be unleashed with credit cards when they get to college, whether they have learned how to use them responsibly or not. This is a recipe for disaster. In order to avoid problems later, parents must build their children’s financial literacy while they are still in the nest. Doing so will make things easier for kids when they strike out on their own and will ultimately lead to a more fiscally
responsible society.

[Disclosure: Some of the links within this article point to CardHub.com, which is owned by the same parent company as Wallet Blog.]

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