05.14 Having the Credit Card Talk With New Graduates

Don’t invite me to be your graduation speaker. Seriously. My address would be, “Credit Cards are the Devil’s Spawn!” Hear the yawns?

Yet it should be required for every graduating senior in the country. Legions of fresh victims turn 18 each year and are eligible for cards. The credit card companies unleash reams of “You are already approved” letters. They will send them to the unwary for the rest of their lives.

Yet the new cardholders exult: adulthood has arrived! With the freedom to spend more than they have, how likely are they to exhume the fine print to find they are “approved” to lose 10, 15, 20 or more cents on every dollar they charge, every year they don’t pay that dollar off?

This is why every high school senior and college freshmen should be required to recite, “The single greatest barrier to financial independence is unmanageable debt, of which the worst is high interest debt. The worst high interest debt is the credit card, and the worst card is the store card.” It’s barely longer than the Pledge of Allegiance. Man up.

A store card is what retailers such as Home Depot, Wal-Mart, The Gap, and Tommy’s Discount Trash offer. They routinely charge way higher interest than your garden variety Visa or MasterCard from a bank – 20% and up annually. The rates can even reach other cards’ penalty rates for missing payments. Just think, at 24% a year, the debt doubles in three years (See, The Rule of 72). Cardholders suffer, card issuers rejoice.

What a racket! Retailers sell you low-profit items so you can pay them high profit through your store card balance interest charges. This is why Amazon and others offer you a good-size credit or discount for taking their card. They expect to earn that and much more back when you can’t pay the balance off in full every month, start carrying a balance and owe exorbitant interest.

No wonder at every retailer’s checkout counter, some sweet young person asks if you would like a store-card-and-receive-a-super-discount? If you demure, the unspoken reply is, “No? You don’t like being given something? Out of our store you ungrateful wretch, you don’t deserve to shop here!” Most of us find it very hard to say no in these situations.

It’s like the classic Far Side cartoon of a horizontal woman holding onto a parking meter to avoid being sucked into the candy store. (In fairness, that could be me.) The store is debt and the force against her is the marketing and advertising billions spent to make us buy things we don’t need on credit.

So people take the cards, despite the loan shark interest rates. And the stores approve instantly almost anyone with a heartbeat, name and address. Fido can get a store card, and very probably with a higher spending limit than you or me.

This is why we should all have the Other Talk – the one about credit cards, and especially store cards – with young people we care about, while they have a chance.

“Devil’s spawn?” That’s too nice.

Tom Jacobs is Investment Advisor and Portfolio Manager with Dallas’s Echelon Investment Management. You can reach Tom for a consultation at tjacobs@echelonim.com.

Photo: Ryan McGuire