Young People and Financial Matters - Term Paper Example

Introduction A1. Problem A1. a. Problem Statement of Social predicament A1. b. Details of the Social problem A1. c. Evaluation of the Social Problem B1. Cause B1. a. Statement of the Problem B1. b. Details of the Cause B1. c. Evaluation of the Cause C1. Impact C1. a. Statement of the Impact C1. b. Details of the Impact C1. c. Evaluation of the Impact D1. Solution THE GROWTH OF DEBT AMONG YOUNG AMERICAN Credit card use is one aspect of consumer markets that is continuously examined in many ways. This particular research is aimed at discovering how much knowledge is afforded college and university level students in the use, abuse, management or mismanagement of credit. Within this research is found an exploration of the information available and studies already conducted in regard to credit usage throughout the US and even internationally. There is a singular focus on the US that finds collegiate level students with a greater understanding of credit and its use and abuse than in previous studies, however, the need students express would in fact be in regard to a lack of resources and courses for study in regard to financial management and specifically handling of credit issues because it is reported that about 75% of US students borrow using credit cards. (Economic Crisis, 71) The purpose of this research would be to determine the three most fundamental questions related to the aspect of growth of debt among young Americans. What is the social problem? 2) What cause this social problem? 3) What is the impact to the people of this social problem? 4) What are some solutions regarding to this social problem? One of the interests financial planners have would be in understanding how money attitudes can be related to both investment and savings behaviors. Financial counselors wish to understand the how and why students either intentionally or unintentionally get themselves into debt. The rapid rise in consumer credit card debt and personal bankruptcies causes concern with policy makers and this is one reason for the study. There is increasing evidence that credit card debt has contributed to the rise in family financial problems and personal bankruptcies (Brobeck, 45). In the quest to discover why consumer credit card use and debt are increasing it is important to understand an individual’s attitudes towards credit, money and debt (Hayhoe, 645). The use of credit has become almost a rite of passage for many collegiate students worldwide. The objective of this paper would be to study the attitudes of university students in the use of credit cards and the general use of money. The aim in actuality is to study the positive and negative credit card usage by University students and the reasons behind their usage or abuse. University students often are faced with a barrage of financial considerations including credit cards, financial institutions, student financing for educational purposes, part-time employment and other such financial decisions to manage. The research conducted would be inclusive of local collegiate students just beginning their tenure on campus and those that have been on campus for a year or more. Credit Cards have gained a lot of popularity in the United Kingdom and around the world. Most businesses use credit card services. The businesses, especially retail stores, have their own credit cards. They either have just a credit card for their store alone or they might have a Visa, MasterCard or even an American Express logo on it where the consumers can use that credit card no matter where they shop. In fact, if the businesses did not use credit cards they would lose a good chunk of money. This review will cover credit use and abuse, credit cards themselves, consumer decision making, consumer attitudes, adoption behavior, credit card debt and the viewpoint of credit card issuers and banks. Long term cardholders who carry a balance, pay late, and on occasion would surpass their credit limit, thus incurring additional fees, would in fact be the most profitable customers for card issuers. The reason, according to the Saint Paul Foundation (2003) would in fact be that further penalty pricing in the form of higher interest rates would typically be imposed sixty days after a cardholder would violate the account agreement. This usually occurs in going past due on a payment. This higher interest rate may compensate the issuer for higher risk, it actually may tend to increase risk for the consumer that pays it (Saint Paul Foundation, 66). The reason for this would be that there is a higher risk at default for the consumer credit card holder as a resulting rise in costs. The Saint Paul Foundation report (76) brings many different things to light in regard to hypothesizing in regard to credit card use, behavior and abuse by credit card consumers including college and university students on campus. From this analysis, the committee at the Saint Paul Foundation believes that there would in fact be problems that would ultimately lead to misuse of credit cards and that these problems arise from a combination of factors. Those factors include industry practices, consumer behavior and some government oversight weaknesses. The foundation summarizes their findings in this fashion by asking a series of questions (Saint Paul Foundation; 77). According to the research done, consumer credit is obtainable but it is not the key issue involved. The issue would be the complex and competitive manner in which credit cards are offered and would distract consumers from understanding the terms to which they are agreeing and accepting the responsibility and consequences that travel hand in hand with credit use. Young people and others who would be new to the credit market would be more vulnerable than others. College students are target market for credit issuers and banks and often their level of financial literacy would not include basic skills necessary to manage credit. Although this report does not address the elderly, there would in fact be equally disturbing data in regard to their levels of indebtedness (Saint Paul Foundation; 78). There is one question that we all must ask ourselves and that question is “Should I apply for a credit card?” The answer is yes you should apply for a credit card because if you don’t have any credit you will be able to get credit by applying for a credit card and when the time comes you will be able to get yourself a car or whatever else without needing a co-signer. Without any credit in your name it is hard to get a car or even an apartment in just your name. So, when you ask yourself should I apply for a credit card the answer is yes. Applying for a credit card is as simple as 1-2-3 and that is because the only thing you have to do is fill out a credit card application and send it in or you can apply over the phone and in most instances you will be approved right over the phone. By obtaining a student credit card, students reap benefits by not only assisting with daily budgeting, but in initiating the creation of a credit history that could provide support for future loan or mortgage applications. Drawbacks to the use of a credit card include temptation to abuse these newly obtained credit facilities. This due to the consideration that any credit obtained will always need repayment and building a poor credit history can ultimately prove damaging to future finance applications (Lowe, 1). It should be further noted that students would not be restricted to simply choosing student credit cards, however. The reason would be that some standard credit cards would not require a stable minimum regular income. There is generally little or no difference between these cards themselves, and various free extras available combined with the simplicity of obtaining a student credit card over a standard one frequently manages to make student targeted cards the better option (Lowe, 1). There are a lot of benefits to having a credit card. The most important benefit is the convenience that they offer. So, instead of carrying cash on you, which can be very unsafe you can just carry a small piece of plastic with you. Another benefit is that you get interest free credit i.e. you don’t have to pay the bills till the next monthly billing cycle. So, you can buy now and pay later (when your salary arrives) a great reason to apply for a credit card. The only thing you have to remember is that there is always an APR rate and that is an Annual Percentage Rate. As long as you pay that credit card in full the next billing cycle you will not be charged the annual percentage rate. If you do not pay the bill in full you will be charged the APR rate or finance charge. Studies show that most college students have credit cards. In fact most college students use the credit cards to pay their college tuition. They also seem to carry a balance on that credit card from month to month. Those students that did not pay their tuition on their credit card did not carry a balance from month to month. We do not know if the extents to which tuition charges are the reason students carry credit-card balances. According to Jacqueline King the director of the ACE Center for Policy Analysis states that if students are carrying a balance on their credit cards from paying their tuition is very troubling and that is because there are less expensive forms of credit. (Associated Press, 3) The use of credit cards among college students and universities has received more interest in recent years from members of the credit card institutions. College students are the number one target by credit card companies because they are a desirable market and because it is estimated that they are to have higher than average earning power. Unfortunately, “credit has been linked to various problems in the college student population such as anxiety, dropping out of school, filing for bankruptcy and even suicide”(Mannix, 127; McMurtrie, 41). These credit problems are because not all college students understand the financial implications of having more than one credit card and/or carrying a large amount of credit card debt. The more credit cards, the more likely they are to spend more (Feinberg, 348). Accordingly information which was cited as: (Kidwell, 589) students that did not have enough money in their checking account to use cash, write a check, or use their debit card, they were the ones more likely to acquire a new credit card for means of purchasing their books for college or even pay for their college tuition. A study done by the FSA on student use and understanding of credit states that “All parents in our sample warned their children to avoid debt and attempted to teach them about the importance of saving, whether or not the parents themselves were savers” (Warren, 165). This study states that young people would own quite the range of financial products including checking, savings, and credit cards or store cards. The role of money for the young people in this study relates that “money was important to all young people for socializing and creating an image for themselves” (Warren, 166). This study proves that there are many concerns that must be addressed in regard to full understanding of financial and fiscal responsibility by college and university students. Durkin provides insight in regard to consumer attitudes toward credit cards. The research involved determinations in regard to how attitudes changed over a set period of time. Overall opinion, according to the treatise, finds that attitudes tend to be toward the negative end of the spectrum in regard to credit card use in 2000 where it was not so in 1970 rising from 28% to 33% (Durkin, 623). There were more than18.3 billion credit card transactions in the year 2003. The reputation of credit cards continues to increase every year and that is because more and more consumers use credit cards and the number one reason is that businesses are starting to accept more than just their credit cards they also accept the major credit cards such as MasterCard, Visa, and American Express. But, we do need to ask ourselves; why, do merchants accept credit cards? We ask ourselves this question because we know that credit cards are very costly especially to process the payment. (Hayhoe, 656) The attitudes of college students in regard to credit were measured. Researchers in this particular cares developed a Likert summated ratings scale which was composed of a series of statements relating to credit cards. These statements included fifteen statements related to feelings about credit cards consisting affective relationships with them, twelve statements reflected toward the usage of credit cards consisting the behavioral relationships between college students and credit cards. Ten questions related to the knowledge college students possessed in relation to credit consisting the cognitive measure. The findings indicated that college students had favorable attitudes towards credit. Of those surveyed, 82% of the students had favorable affective attitudes and 67% had favorable cognitive attitudes. However, 25% of the students had unfavorable behavioral attitudes, while only 20% have favorable attitudes. (Hayhoe, 656) Reeves from Forbes.com however provide interesting insight into adoption behavior by college students. “Credit cards can teach students financial discipline and help build a good credit rating that will become important after graduation, when a car and, later, a house become important”(Reeves, 87). Scott Reeves continues in this vein by saying that playing it safe when it comes to credit card use is a good defense for parents to prepare their college students for life in the future. “But play it safe: Put a low limit on the card. Talk to the bank and make sure that the credit limit isn’t automatically increased if the bills are paid on time” (Reeves, 87). Credit Card Search Organization provides an interesting concern in regard to adoption behavior in regard to credit cards among university students. “The number of students owning a credit card is constantly rising as well as the amount of credit card debt held by students. Eighteen year-olds can get a credit card without parental consent or employment” (Credit Card Search, 227). This particular piece continues on stating that though there are advantages to adoption of credit cards, the disadvantages can often outweigh them. This is especially in regard to students with student loans and credit card debt or for those who use their credit cards to pay tuition and fees. Credit Card debt is often associated with spending too much and in place of using cash or checks, credit card balances would be utilized. Credit Card debt occurs regardless of who incurs it but would mainly happen in regard to college and university students (O’Malley, 79). An average of students’ credit card debt in 2001 to be in excess of $2000 and 47% of these students carried four or more credit cards. Regardless that credit card debt decreased from 2000 to 2001, the median credit card debt increased and the percentage with balances in excess of $3000 but less than $7000 increased from 13% to 21%. Those in excess of the $7000 range would have decreased from 9% in 2000 to 6% in 2001. “When combined with their student loan debt, the average debt level for freshman was $3,150 ($1,533 in credit card debt and $1,617 in student loan debt). For seniors, the average combined debt was $20,402 ($3,262 in credit card debt and $17,140 in student loan debt” (O’Malley, 81). Forty-two percent of former undergraduate students who participated in the 2002 National Student Loan Survey reported that student loan debt was a major reason for not attending graduate school (Hayhoe, 654). In many cases, credit card spending is assumed to be linked to profligate spending habits in place of long-term debt related to mortgages or car payments. Within the credit card industry, there is very limited access or incentive to assist people in directing them away from financial trouble. Usually, by the time anyone considers assisting consumers away from financial trouble it is far too late according to the Saint Paul Foundation report (88). A very intriguing article written by (Hall, 36) relates the true story of an American businessman who found that his use of credit was in fact his downfall. “Steve was pounds 12,000 in debt, not, as he admits, a huge sum by today’s standards. But it was to change his life” (Hall, 36). In conclusion it could be stated that credit counselors would agree that their services at this juncture could in fact be more effective if people would see the problematic situation in credit card debt before the problems became severe. In a (1998 report on consumer bankruptcy), VISA USA presented research that would strongly suggest that intervention geared directly toward behavioral change can often make a significant difference when applied earlier in the financial cycle, before consumers resort to declarations of bankruptcy. Early intervention would in fact assist people in avoiding bankruptcy and also would assist in a return to financial health if bankruptcy is the only option. Thus it is obvious that a solution is fast needed for the young Americans and that solution could be development of morality that would resist the young Americans from being a compulsive buyer with help of a credit card. Works cited Economic Crisis; Generation broke; Chapter 6. pg. 68-72 Brobeck, S; The Consumer Impacts of Expanding Credit Card Debt, Consumer Federation of America News Release; 1997 Hayhoe, Celia R. Leach, L. Turner, Pamela R. (December 1999) Discriminating the Number of Credit Cards Held by College Students Using Credit and Money Attitudes, Journal of Economic Psychology, Vol. 20, Issue 6, pp 643-656 Credit Card Debt; Helping the Consumer Become a Better Financial Manager; The Saint Paul Foundation Report; February 2003 Lowe, Sam; Credit Cards for Students – Are They a Help or a Hindrance; aticlegallery; 2006; retrieved on 11/11/2007 from http://www.articlealley.com Associated Press; Study Says Most College Students Have Credit Cards; CBS News; Associated Press, Washington; July 17, 2006 Mannix, M; The credit card binge; U.S. News and World Report, 127, 89; September 6, 1999 McMurtrie, B; Study documents the extent of students’ credit-card debt. The Chronicle of Higher Education, 45, 41, A44; 1990, June18 Feinberg, R; Credit card as spending facilitating stimuli: A conditioning interpretation; Journal of Consumer Research; 13, 348-356; 1986 Kidwell, B. & Turrisi, R; A cognitive analysis of credit acquisition and college student financial development; Journal of College Student Development, 41, 589-598. 2000 Warren, R; Young People and Financial Matters, Financial Services Authority, NOP Research Group; March 2004 Durkin, Thomas, A; Credit Cards: Use and Consumer Attitudes, 1970-2000; Federal Reserve Bulletin, p 623 & 627; September 2000 Reeves, S; Better Budgeting for College Students; Alliance Publications; September 22, 2005 Credit Card Service; Educational Journals; WordPress; June 25, 2006 O’Malley, M; Educating Undergraduates on Using Credit Cards; Article for Industry Professionals; 2006 Hall, J; How Can You Credit This Debt Level? The Journal; Page 36; October 18, 2005 Read More