FDIC Consumer News Spring 2005 - A Special Guide for Young Adults
If at First You Don't Succeed: Common Mistakes Young Adults Make with Money and How to Avoid Them
Everybody makes mistakes with their money. The important thing is to keep them to a minimum. And one of the best ways to accomplish that is to learn from the mistakes of others. Here is our list of the top mistakes young people (and even many not-so-young people) make with their money, and what you can do to avoid these mistakes in the first place.
Buying items you don't need...and paying extra for them in interest. Every time you have an urge to do a little "impulse buying" and you use your credit card but you don't pay in full by the due date, you could be paying interest on that purchase for months or years to come. Spending money for something you really don't need can be a big waste of your money. But you can make the matter worse, a lot worse, by putting the purchase on a credit card and paying monthly interest charges.
Research major purchases and comparison shop before you buy. Ask yourself if you really need the item. Even better, wait a day or two, or just a few hours, to think things over rather than making a quick and costly decision you may come to regret.
There are good reasons to pay for major purchases with a credit card, such as extra protections if you have problems with the items. But if you charge a purchase with a credit card instead of paying by cash, check or debit card (which automatically deducts the money from your bank account), be smart about how you repay. For example, take advantage of offers of "zero-percent interest" on credit card purchases for a certain number of months (but understand when and how interest charges could begin).
And, pay the entire balance on your credit card or as much as you can to avoid or minimize interest charges, which can add up significantly.
"If you pay only the minimum amount due on your credit card, you may end up paying more in interest charges than what the item cost you to begin with," said Janet Kincaid, FDIC Senior Consumer Affairs Officer. Example: If you pay only the minimum payment due on a $1,000 computer, let's say it's about $20 a month, your total cost at an Annual Percentage Rate of more than 18 percent can be close to $3,000, and it will take you nearly 19 years to pay it off.
Getting too deeply in debt. Being able to borrow allows us to buy clothes or computers, take a vacation or purchase a home or a car. But taking on too much debt can be a problem, and each year millions of adults of all ages find themselves struggling to pay their loans, credit cards and other bills.
Learn to be a good money manager by following the basic strategies outlined in this special report. Also recognize the warning signs of a serious debt problem. These may include borrowing money to make payments on loans you already have, deliberately paying bills late, and putting off doctor visits or other important activities because you think you don't have enough money.
If you believe you're experiencing debt overload, take corrective measures. For example, try to pay off your highest interest-rate loans (usually your credit cards) as soon as possible, even if you have higher balances on other loans. For new purchases, instead of using your credit card, try paying with cash, a check or a debit card.
"There are also reliable credit counselors you can turn to for help at little or no cost," added Rita Wiles Ross, an FDIC attorney. "Unfortunately, you also need to be aware that there are scams masquerading as 'credit repair clinics' and other companies, such as 'debt consolidators,' that may charge big fees for unfulfilled promises or services you can perform on your own."
Paying bills late or otherwise tarnishing your reputation. Companies called credit bureaus prepare credit reports for use by lenders, employers, insurance companies, landlords and others who need to know someone's financial reliability, based largely on each person's track record paying bills and debts. Credit bureaus, lenders and other companies also produce "credit scores" that attempt to summarize and evaluate a person's credit record using a point system.
While one or two late payments on your loans or other regular commitments (such as rent or phone bills) over a long period may not seriously damage your credit record, making a habit of it will count against you. Over time you could be charged a higher interest rate on your credit card or a loan that you really want and need. You could be turned down for a job or an apartment. It could cost you extra when you apply for auto insurance. Your credit record will also be damaged by a bankruptcy filing or a court order to pay money as a result of a lawsuit.
So, pay your monthly bills on time. Also, periodically review your credit reports from the nation's three major credit bureaus Equifax, Experian and TransUnion to make sure their information accurately reflects the accounts you have and your payment history, especially if you intend to apply for credit for something important in the near future. For information about your rights to obtain free copies of your credit report and have errors corrected, see the FTC's fact sheet Your Access to Free Credit Reports online at www.ftc.gov/bcp/conline/pubs/credit/freereports.
Having too many credit cards. Two to four cards (including any from department stores, oil companies and other retailers) is the right number for most adults. Why not more cards?
The more credit cards you carry, the more inclined you may be to use them for costly impulse buying. In addition, each card you own even the ones you don't use represents money that you could borrow up to the card's spending limit. If you apply for new credit you will be seen as someone who, in theory, could get much deeper in debt and you may only qualify for a smaller or costlier loan.
Also be aware that card companies aggressively market their products on college campuses, at concerts, ball games or other events often attended by young adults. Their offers may seem tempting and even harmless perhaps a free T-shirt or Frisbee, or 10 percent off your first purchase if you just fill out an application for a new card but you've got to consider the possible consequences we've just described. "Don't sign up for a credit card just to get a great-looking
T-shirt," Kincaid added. "You may be better off buying that shirt at the store for $14.95 and saving yourself the potential costs and troubles from that extra card."
Not watching your expenses. It's very easy to overspend in some areas and take away from other priorities, including your long-term savings. Our suggestion is to try any system ranging from a computer-based budget program to hand-written notes that will help you keep track of your spending each month and enable you to set and stick to limits you consider appropriate. "A budget doesn't have to be complicated, intimidating or painful just something that works for you in getting a handle on your spending," said Kincaid.
Not saving for your future. We know it can be tough to scrape together enough money to pay for a place to live, a car and other expenses each month. But experts say it's also important for young people to save money for their long-term goals, too, including perhaps buying a home, owning a business or saving for your retirement (even though it may be 40 or 50 years away).
If you pay only
the minimum payment due on a $1,000 computer, let's say it's about $20 a month, your total cost at an Annual Percentage Rate of more than 18 percent can be close to $3,000, and it will take you nearly 19
years to pay it off.
Start by "paying yourself first." That means even before you pay your bills each month you should put money into savings for your future. Often the simplest way is to arrange with your bank or employer to automatically transfer a certain amount each month to a savings account or to purchase a U.S. Savings Bond or an investment, such as a mutual fund that buys stocks and bonds.
Even if you start with just $25 or $50 a month you'll be significantly closer to your goal. "The important thing is to start saving as early as you can even saving for your retirement when that seems light-years away so you can benefit from the effect of compound interest," said Donna Gambrell, a Deputy Director of the FDIC's Division of Supervision and Consumer Protection. Compound interest refers to when an investment earns interest, and later that combined amount earns more interest, and on and on until a much larger sum of money is the result after many years.
Banking institutions pay interest on savings accounts that they offer. However, bank deposits aren't the only way to make your money grow. "Investments, which include stocks, bonds and mutual funds, can be attractive alternatives to bank deposits because they often provide a higher rate of return over long periods, but remember that there is the potential for a temporary or permanent loss in value," said James Williams, an FDIC Consumer Affairs Specialist. "Young people especially should do their research and consider getting professional advice before putting money into investments."
Paying too much in fees. Whenever possible, use your own financial institution's automated teller machines or the ATMs owned by financial institutions that don't charge fees to non-customers. You can pay $1 to $4 in fees if you get cash from an ATM that isn't owned by your financial institution or isn't part of an ATM "network" that your bank belongs to.
Try not to "bounce"
checks that is, writing checks for more money than you have in your account, which can trigger fees from your financial institution (about $15 to $30 for each check) and from merchants. The best precaution is to keep your checkbook up to date and closely monitor your balance, which is easier to do with online and telephone banking (see High-Tech Banking, 24/7). Remember to record your debit card transactions from ATMs and merchants so that you will be sure to have enough money in your account when those withdrawals are processed by you bank.
Financial institutions also offer "overdraft protection" services that can help you avoid the embarrassment and inconvenience of having a check returned to a merchant. But be careful before signing up because these programs come with their own costs.
Pay off your credit card balance each month, if possible, so you can avoid or minimize interest charges. Also send in your payment on time to avoid additional fees. If you don't expect to pay your credit card bill in full most months, consider using a card with a low interest rate and a generous "grace period" (the number of days before the card company starts charging you interest on new purchases).
Whenever possible, use your own financial institution's automated teller machines or the ATMs owned by institutions that don't charge fees to non-customers.
Not taking responsibility for your finances. Do a little comparison shopping to find accounts that match your needs at the right cost. Be sure to review your bills and bank statements as soon as possible after they arrive or monitor your accounts periodically online or by telephone. You want to make sure there are no errors, unauthorized charges or indications that a thief is using your identity to commit fraud.
Keep copies of any contracts or other documents that describe your bank accounts, so you can refer to them in a dispute. Also remember that the quickest way to fix a problem usually is to work directly with your bank or other service provider.
"Many young people don't take the time to check their receipts or make the necessary phone calls or write letters to correct a problem," one banker told FDIC Consumer News. "Resolving these issues can be time consuming and exhausting but doing so can add up to hundreds of dollars."
Even if you are fortunate enough to have parents or other loved ones you can turn to for help or advice as you start handling money on your own, it's really up to you to take charge of your finances. Doing so can be intimidating for anyone. It's easy to become overwhelmed or frustrated. And everyone makes mistakes. The important thing is to take action.
Start small if you need to. Stretch to pay an extra $50 a month on your credit card bill or other debts. Find two or three ways to cut your spending. Put an extra $50 a month into a savings account. Even little changes can add up to big savings over time.