Wednesday, March 16, 2011

Jeans and Gasoline - Credit and The American Teenager

Virtually every teenager with a job earns money solely for the sake of good times and good clothes. “Good” being a relative term, of course, but revolving almost exclusively around jeans and gasoline. Their parents have long given up buying clothes for them as teen fashion evolves and gets ever more expensive so they tell their progeny to go forth and employ themselves if they simply cannot live without hundred-dollar pairs of denim, two-hundred dollar Jordans and some “to die for” shirt that matches the cost of a week’s groceries. To top all of that off most families at least insist they pay for their own gasoline as a “compromise” between the expense of fuel and car insurance.

Such is the life of most teenagers in America as well as the extent of financial planning. The “B&A” crowd (brains and athletes) don’t worry about college as they fully expect grants and scholarships all the way up to a full ride at the schools of their choice. The rest go the student loan or 2nd mortgage route along with perhaps a healthy mix of work-study to BEGIN the introduction to the true cost of adult life in western society. Literally overnight most teenagers go from fast food and fast, care free living to thousands of dollars in debt racking up every semester while still living relatively carefree lives for at least the next four years.

Their “out?” As long as they stay in school the six month time clock before the first payment comes due is put off: stay in or go back to school, add on a ton of MORE debt ostensibly to better the self but also and critically to avoid paying off the debt already acquired. It is certainly a time-honored strategy for those who do have higher aspirations to serve but also for those who hoped to enter the job market with no decent prospects in sight. This subset go back to school to wait out the economy and come in with even more credentials to go along with enough debt to keep them nervous for the next 15 – 20 years.

One day while walking up to the Student Union, the “Rat” or other primary gathering place students find a ton of folding tables set up in the foyer with banners mounted overhead or behind on the walls. Every retailer in America just about is on hand vying, pushing and shoving for the attention and hopefully lifelong business of the assembled future of America. Student oriented “products and services” are all dolled up and hawked with aggressive fervor to open new lines of credit and consumer accounts. The parade of new customers runs all day, human lemmings mindlessly racing to the cliffs of financial acumen or abyss.

Imagine the number of students at colleges and universities with little financial education prior to arriving now suddenly faced with a smorgasbord of the biggest houses and names in business, American Express, Sears, Visa, Bank of America and Home Depot. Open an account with us, they scream! You need us to get started, they claim. All of the hippest people have our Blue Diamond Amethyst Card, they cry. Sign up now! Usually one of the first "purchases" with this new found clout and show of prestige is a night on the town. Some of the more frugal and long-suffering might splurge on new bed linens for the dorm but most of these early charges are long forgotten items and events like dinners out, bar tabs, sports tickets and all such things one expects the young and newly credited to buy.
Ask yourself truthfully if any new member signs up for all kinds of “free and easy” credit and then not use it?

The dirty rotten secret is the financial companies really can’t lose. Using the “spaghetti test” approach to new customers, the good ones that stick are actually counter intuitive to what one might think. They are actually the bad customers who wind up delinquent and trend towards defaults. They create years of bad credit history and thus years of higher interest in the sub-prime market (anyone with less than a 650 credit score). The larger financial institutions eventually charge them off and have little further to do with such deadbeats. The bottom feeders, however, make huge amounts of money on fees, late charges and high interest on accounts as small as $500 because they know it takes less than a minute to max out a card like that. Given all kinds of statistical data, their "borrower" will be on the hook for years to come, especially if they only make the minimum payments with interest AVERAGING 29%. Think about it.
The ones who generate good press are those who pay on time, have excellent credit and so on but they’re also the worst customers in terms of profits. They pay low interest for tons of credit if they pay over time at all. They have to keep something going in the way of revolving credit just so the reporting bureaus have something to track but by and large they carry very low balances and everyone knows why. They can afford to pay in full and/or they know better than run up monster tabs that can't be paid off in less than six months. The lenders all look at this group and say "Uh, yea, thanks guy, really appreciate ya. You’re not the money maker we wanted, actually, but your room mate who can’t keep a dollar in his pocket and is in hock up to his frizzy red hair to you, his parents and everyone else who doesn’t know any better? Send HIM over!
Your mortgage and your car are the only two things that should be on installment plans past three years. Anything outside of that, furniture, electronics, appliances, clothes, etc and you'll have paid far more interest than the original price, certainly at least more than the items are worth. THEY know that, shouldn't you?

Gotta go!

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