I was reading up some articles at CBS News, and came up on this interesting one: Meet “Generation Plastic”. It’s about students who get caught up with credit card debt. Apart from some sad stuff about credit card marketing strategies, there is something else to notice in the article. Read this:
“I had Visa, Visa MasterCard, First Financial Bank, Visa, Gap, Target” says college senior Sara Magee. She was lured at 18 by the promise of a free Frisbee. A dozen credit cards later, she’s working three jobs to pay down $6,000 in charges, fees and interest.
“I didn’t understand interest and what a high APR was — I really just didn’t understand the concept, and it seemed like a good idea — like (I) can’t afford it now, but I will pay it off later,” she says.
This comes from a graduating senior!
I am pretty sure there are a whole lot of students in the same boat - and of course, there must be a whole lot of non-students who know diddly-squat about credit cards, their usage, and related terminology.
When you don’t know what “APR” is, how much it will cost you in interest, what are the consequences of late payments, etc. - and you still keep swiping it around as much as you can; then you are basically the guy in this picture (been there, done that):
Now, blaming credit card companies for high fees, twisted marketing tactics, and unfair billing practices is all meaningful - only AFTER we, on our part, take enough efforts to understand how these things work. The way I see it, most pain and suffering caused by credit cards is initiated due to credit card abuse by the consumer. This pain is then compounded by credit card companies’ tactics.
To solve part of the problem, here is an outrageous suggestion: impose a card-specific, knowledge-based test to determine whether a person is eligible for *using* a credit card. A credit card application won’t go through unless all the questions are answered correctly. Such tests should include simple questions like:
- What does APR stand for?
- What is the grace period on the card for which you are applying?
- What will be your APR if you miss one payment?
…and some moderately challenging questions like these (moderately challenging = something that a monkey will not be able to answer easily):
- What will be the minimum payment due if you carry a balance of $5000 during the statement period?
- At 14% APR, how much would it take for you to pay off $1000 balance on your credit card if you keep making minimum payments?
Feel free to thrown in suggestions for questions that you think should be part of such a test. Sarcastic suggestions are perfectly OK. 
This will serve some good purposes like:
- The extra hassle will discourage casual credit card seekers - and it will enforce awareness for those who seriously want to have a card.
- It (the numbers) will make people think twice before applying for a relatively *bad* credit card.
- Even if people cheat on such tests, they will be forced to look up (or ask for) some information - which would still serve the purpose of raising awareness.
Yeah people will whine and moan - but that exactly would be the purpose of such a test - to make them whine and moan before they get their credit cards instead of after using them mindlessly.
For students, there should be a “Credit Cards 101″ course…and they should not be allowed to apply for a card unless they have taken that course. It will be interesting to see how many students just give up on credit cards just because they want to avoid the course.
“You are pre-approved” will have a radically different meaning.
Any other novel preventive measures or suggestions for refinement? (”ban credit cards” is not creative enough)
Some amount of sarcasm is intended (more than a solution to any specific problems) through this post. The aim is to channel our thinking towards how to make (force) people understand credit cards before they start using it foolishly. The qualifying test is just one potential hypothetical measure ~ to be taken with a grain of salt. One can easily fathom the enormous social effort that will be required if such a system were to be practically implemented.
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I’d kind of turn a couple of your points on their heads.
In my opinion, the pain and suffering is initiated by the banks/issuers and is then compounded by the behavior of the cardholders. Put out a product that is easily abused and market it to a group likely to abuse it. Then the consumer follows through and abuses it (to their own detriment, obviously).
As far as the test, I think that’s what that block of information on the back of the application is supposed to do. The government mandated issuers list in plain English what the APR is, what the annual fee is, etc. There’s only so much you can do when trying to save people from themselves.
And just for the record, I was one of those dummies who buried themselves in credit card debt during college.
Who would be imposing and/or writing this required test? Are we asking the government to get involved, or are we actually hoping that credit card companies are going to take a suggestion which would drastically reduce the number of uneducated people who use their cards, thus racking up the fees and interest rates that make the credit card companies their profits?
My parents taught me that if I get a credit card with a credit limit of $1000, I first need $1000 in the bank.
If you have the April 2007 edition of the “Fortune” magazine, go to page 209. There’s a nice illustration of home much bigger financial services (at $257.2 billion from JP Morgan Chase, Citigroup, Bank of America, American Intl Group, General Electric) are when compared to energy (at $122.9 billion with Exxon Mobil, MRO, Chevron, Valero, Conoco Phillips) and even Consumer Staples (at $78.8 billion with PepsiCo, Proctor Gamble, Altria, Time Warner, Coca-Cola).
Together those three chunks make up $785.1 billion with financial services being 32%, energy 15% consumer staples 10% and 41.5% goes to “all other sectors.”
Bottom line: financial services are huge. And we the consumers made them that way. However, it’s our responsibility to get educated on how to use credit responsibly.
KMC: The block of information is a passive way of relaying information. We sort of need something active ~ something that forces people to take notice.
MoneyDummy: Well…the test is just a (sarcastic) suggestion along the lines “what will it take to make people understand credit cards before using them” ~ and by no means a concrete solution. If such a thing were to be implemented with seriousness, it would take a massive will on part of the government - and given the credit card companies’ clout, that’s unlikely to happen. May be this leads to a somewhat similar solution that keeps out people who act crazy with cards.
There is a subtle fact that I have ignored in the post - people who default on credit cards are as essential in making things feasible for those who don’t default (like you said ~ to keep the interest rates low and fees manageable).
John: “if I get a credit card with a credit limit of $1000, I first need $1000 in the bank.” that’s a better way of looking at it but, unfortunately, most don’t do it that way.
Good news at last! I’m speaking about the credit related test you are introducing. Yes, if credit education programs are so difficult to carry out and if potential applicants are unwilling to attend them, then they will just have to take the test before getting a credit card. The test should be implemented,I’m all for it!
A great idea, but the credit card companies make the most money off the people who know the least about how credit cards work. Such a test could put them out of business (which probably wouldn’t be such a bad thing).
All I can say is wow… I have some friends who are dumb with their credit cards, but I feel bad for that girl. It is amazing how through all her years of education there was not one lesson or class on simple credit card management!
“There’s only so much you can do when trying to save people from themselves.”
True. Education is key. Not too much longer and our nations schools will promote a “credit card debt awareness week” along with the current “alcohol and drug awareness programs.
I saw survey results of 2006, one of which said that some 30% of teenagers believe that one shouldn’t pay back credit card loan. It’s just striking! No wonder such naive youngsters later make so huge debts. Creit education must begin at the age of 10 and should disclose both the advantages and the disadvantages of credit.
If there were a test, I think the CC companies would make 10% a passing score
there are plenty of people who can pass a driver’s test but still can’t drive.
A basic test as a prerequisite for obtaining a credit card is a good idea. This would force young adults to learn credit basics. In a perfect world, they should also learn personal budgeting basics and the importance of timely bill paying.
Although good financial intelligence is important we don’t seem to see that is necessary to teach our children how to use credit wisely.
I believe it should be taught in the schools as a real life experience similar to the baby classes that many high schools have. It is hard for a new credit user to see the big picture if they have had no experience in how credit works nor how bad being in debt to credit card companies can get.
Great idea! It’s appalling how uneducated people are about this stuff. Especially on college campuses. I really wish there was more financial education offered (Credit Cards 101, Mortgages 102, Investing 200, etc…) early on.
When you get a card offer in the mail with 0% for 6 months, and no payment many people think that they have enough time to pay it all off when the interest starts adding up. I had the problem of running up $40k in credit card debt several years back, and it’s almost impossible to make a dent in that kind of debt.
Now, I make sure I have money in the bank, and pay off my cards every month. I never carry a balance.
another serious question to include: what type of institutions offer the lowest APR on the card?
My answer: credit unions. Mine is 9.9%
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