As Baby Boomers age, so do their offspring. The target customer for financial services institutions and credit card companies is someone between the ages of 15 and 24 – the teenager.
America is in a new era of conspicuous consumption; the enormous teenage population is chock-full-of cash and has quite the propensity towards spending. Think about how many times you have read recently about the lack of financial education among America’s youth and the alarming negative savings rate. If their parents aren’t financially savvy, how can we expect young people to know what to do with a savings account, a checking account, or a credit card?
If you ask teenagers what a FICO score is, chances are they’ll stare at you blankly, asking “huh?” As disturbing as that sounds, this is the target market for credit card lenders – those who prey upon the FICO scores of America’s youth.
Most at-risk to these scavengers are impressionable, starry-eyed college freshman, overwhelmed by offers from the credit card companies parked around campus. According to the Jump$tart Coalition, 45% of college students are deep in credit card debt, averaging more than $3,000. This statistic is especially alarming when coupled with a report from the Utah Mentor in 2004 that more students drop out of school owing to credit card debt than to academic failure.
While these statistics may be stunning, their numbers can be lowered by prevention. A credit card doesn’t materialize out of thin air, but many college-age individuals are unaware of the consequences faced by only paying the minimum due each month – including a diminishing FICO score and the increasingly difficult task of paying off the complete balance.
If these students had been taught how to manage a credit card before college, would they have acquired so much debt? How can we prevent this downward spiral?
Cards and Credit Unions
Some credit unions have attempted to curtail the problem by introducing both financial literacy classes and a credit card specifically for their younger members. These credit cards have low limits, typically between $250 and $500 (see Case Study on T&C FCU on page 45 of the 1Q print edition of CUSP ).
Several benefits attest to these cards, both for the members and the credit union. Clearly, 17-year-olds will enjoy the freedom (and “cool” factor) that comes with using a credit card, but what they don’t realize is that by paying their bill in full each month, they are learning how to be fiscally responsible and build good credit. The low limit on the card protects them against falling too deep into debt (something for which those other credit card lenders lack any compassion).
In addition, studies have shown that persons’ first credit cards tend to be the ones they will use most frequently and carry the longest in their wallets. If a member’s first card is from the credit union, he or she may then become a lifelong member.
Learning how to be fiscally responsible is like learning how to ride a bike. It may be difficult at first, but once you get the hang of it, it’s second nature. The same can be said for being fiscally responsible with a credit card. By teaching younger members how to be fiscally responsible, especially when it comes to using credit cards, credit unions are building lifelong members who have all the skills for staying out of credit debt.