A lot of young adults are already heading down the road to financial hardship. Many will have problems with credit due to school loans, inexperience, financial optimism and social pressures, which will all lead to a bad credit rating. It’s important that young adults know the importance of bad credit and the effects it can have in the long run. Restraining today can help you out in a major way down the road.
Young Adults and Their Inexperience
David Laibson, a renowned behavioral finance professor at Harvard, did a study that demonstrates how there is a learning curve dealing with “gotcha” fees – it’s the new members of credit institutions that are slammed with the lion’s share of these large fees each month. The majority of these new members are young adults, who are known to subsidize the freebies that older and more experienced members enjoy.
The Curse of Student Loans
The co-founder of PayPal, Peter Thiel, is a successful manager of a hedge fund. He recently created a fund that is offering an opportunity for 20 students, who agree to drop out of school and found companies, to earn $100,000 in startup capital. Unlike most people, Peter looks at education as a bad investment, but a lot of 20-somethings who are struggling with finances due to school loans may agree.
“University administrators are the equivalent of subprime mortgage brokers,” he says, “selling you a story that you should go into debt massively, that it’s not a consumption decision, it’s an investment decision. Actually, no, it’s a bad consumption decision. Most colleges are four-year parties.” – Wall Street Journal interview.
Just to pay back a $100,000 student loan, it could take Americans with an average salary a few decades, especially when considering their taxes and living expenses. What’s worse is that they are stuck with these debts even if they file for bankruptcy.
[Free Resource: Check your free credit report and score]Battle With Financial Optimism and Social Pressures
It’s well known that young adults are more prone to social pressures, especially when still single and un-established. Social and career perspectives can take a toll on young adults that are looking to define their lives. With this comes a predisposition to spend money irresponsibly on things like clothing, automobiles and entertainment.
Gen-Y is especially prone to deficit spending that is encouraged by financial optimism, a survey shows. About 85 percent of young adults believe that their financial situation will get better over the next year, while 35 percent who are age 65 years old and older have that perspective. This is causing young adults to buy now and work later, leading to financial hardships in the long run.
Why Your Credit is Important
It is important that young adults learn how important their credit reports are. When you first start out with a limited credit history, you will face scrutiny. By focusing on building good credit, it will serve you well for when you are applying for a rental, cell phone contract or anything else. Then later on in the future, you will be able to use your good credit score to obtain home loans and auto loans. When bad financial decisions are made, like using a credit card to take an expensive vacation to Europe, they could end up haunting you for years to come.
Obtaining good credit is within the control of everyone. It’s important that we use our credit cards responsibly and within our budget, so we can keep our credit in good working order and build a stable credit history. After getting your credit history established, you have to continue to make your payments on time to maintain and improve your score.
College has traditionally been one of the easiest times to get a credit card, since financial institutions market heavily to young credit users. But if for some reason you are unable to get a student credit card, you can always opt to get a secured credit card, which limits your line of credit to how much you put onto the card. After making on time payments for 12 to 18 months, you can transfer your secured credit card to an unsecured credit card.
However, if you are already getting into trouble with your credit card balance, you should try to get the best balance transfer credit card. If you can, you should try to get something with a long zero percent introductory rate to give you ample breathing room. Just make sure that you pay off our balance in full instead of allowing it to accumulate.
The Gen-Y group is pretty optimistic about their financial future, but it is imperative that they avoid credit missteps that can follow them for years to come. Try to refrain from buying things you’re unable to afford, so you can avoid financial destruction in the future.
This post comes from the NerdWallet.com team of financial bloggers and experts in helping consumer compare rewards credit card offers.
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