How teens get sucked into credit card debt

http://articles.moneycentral.msn.com/SavingandDebt/ManageDebt/HowTeensGetSuckedIntoCreditCardDebt.aspx

Summary:

Credit card is a small plastic card issued to users as a system of payment. It allows its holder to buy goods and services based on the holder’s promise to pay for these goods and services in certain amount of time. It is basically borrowing money for personal use from the banks.

There is no secret that many youngsters like college students are sucked into credit card debt. But now it seems the problem can start even before the first year. According to Jumpstart coalition for Personal Financial Literacy, nearly the third of high school seniors own a credit card of their own or one cosigned by a parent because people under the age of 19 can’t apply for credit card. It’s really hard to believe how many teens have credit card and how many are in debt already. It was shocking to learn that kids that are not even old enough to drive are receiving card solicitations. Bodnar, editor of Kiplinger’s Personal Finance magazine disagrees that young people learn financial responsibilities by using credit card as a lot of parents stated. She adds that “it’s funny money for them. It’s not real. It’s a license to spend, and they’re not learning how to manage money on their own.”

Similarly, Adam Wehr’s struggle with the same credit card debt right after he graduated from high school. He adds that he had no idea about interest rates and late fees so he kept spending money from his credit card without thinking that he would have to pay a lot more than he is spending.

Young people still don’t master the tricky nature of credit. They don’t understand the fact that many of the cards have hidden fees. A typical mistake that most parents make is expecting children to make the leap from a childhood savings account to managing a credit card. She states that if to boost children’s financial IQ "They need to know how credit card works and what do you do when the bill comes? Why is it important to pay on time? and How do interest rates work?" Parents also need to set limits on children’s credit. These ways can help children to learn the responsibility of handling credit cards and won’t suffer debt at a very early age.

Connection:

Yes it is fact that credit cards always come handy when you need money but it is in ones hand to make the payments on time so they won’t fall in debt of interest rate charges. It is parent’s responsibility to let their children know about the advantages and disadvantages about credit cards, interest rates and how it works. Once the credit card companies send you the bill for the month, they always ask you to make the minimum payment of the bill which is around $10 and that’s what most of the teenagers do and they end up falling in debt because then the banks start to charge interest and you end up paying the double of what you spent.

Reflection

Credit cards wont be considered dangerous if students acknowledge the downside of the credit cards  and use it accurately. They won’t have to suffer debt if they get to learn about the interest rates and the only way it will be possible if parents teach them about it. Also Banks that provide credit cards needs to let their customers know about the interest rates that they charge if the bill is not paid on time. Taking couple of steps towards this problem will definitely improve the number of teenagers falling in debt.

The Federal Reserve and Interest Rates

March 11, 2009

The Federal Reserve is the Central Bank of the United States and it aids in directing the economy and ensures high rate of employment, stability in prices with reasonable interest rates and sustenance in economic growth.

Let’s begin with Interest rates- the main objective of the Federal Reserve are the interest rates. They influence the Fed in controlling the flow of money in the economy. The Fed s often uses the federal funds rate as the level of interest rate. The bank uses the rate of federal funds as the interest rate when they loan over nightly with each other. Interest rate helps in controlling the economy which is one tool of Federal Reserve monetary policy. For example if the Fed observes rise in flow of money in the economy then they raise the interest rate to reduce lending and borrowing which results in reduction of credit available. Or if they observe vice versa they will reduce the interest rate to make credit available and increase consumers buying services and products.

In the Credit crisis of 2007, the interest rate shot up creating fear in banks loaning with each other. Due to which the Fed eventually had to lower the rate to calm their fears and boost the financial markets. The rate was reduced to 4.75% in Sept 07which then had to be lowered to 3% in Jan 08. This still didn’t regain confidence of the banks or secure credit flow.  Again the failure of Lehman Brothers, Bear Stearns and AIG gave rise to the use of TARP program in order to provide funds to big financial institutions that were in danger of failing too. By Oct 08 the interest rate was as low as 1% and at present is shuttling between 0 to 0.25 %. This has had an effect on the economy. Even though the interest rate is as low as 1%, credit still does not flow smoothly in the US economy. The Prime interest rate is the best rate that can be given to non banks or credit worthy borrowers with limited credit. This shows us that even despite of having such low interest rates, there still lies the unavailability of credit. Therefore, it shows that the U.S. Monetary policy is not helping in the times of the recession to stimulate the economy.

Connection:

Everybody needs money to run their business. They depend on each other to borrow money. Banks could be the best example to choose. Canada Trust (TD) borrows money from other banks when needed and the Bank of Canada. Likewise, US banks borrow money from other banks and the Central Bank of United States. Interest rates changes all the time. When the interest rates increases, borrowing money from others will increase as well, Cost of goods sold would increase and the gross profit for one will decrease because then one would have to pay off his debts(money borrowed from others) with the interest rate. In this case, the interest rates are going down from 4.75% to 3% to 1% to 0.25% which is not beneficial for the economy but good for the business owners, the ones who took loans for their houses and car because then the money that they have borrowed from other would have less interest rates. Cost of Goods Sold would decrease and the Gross Profit will increase which is really beneficial for any of the business owner.

Reflection:

Downfall of the economy is not beneficial for any of the consumer or anyone who works for someone because then he will always be scared of loosing his job. Downfall of economy affects everyone except for some of the business owners (the ones who fulfill the basic needs for every household and family). I remember when the economy was really down in Canada especially after the Olympics. A lot of people lost their jobs and had hard time running their family. Some of the people decided to go for EI (employement insurance) that is the government will provide money for them. Think about it if everyone decides to go for EI, Government will eventually run of money which is not good for the country. So its really not beneficial for the economy to go down.   

 Website:    http://bizfinance.about.com/od/debtandequity/qt/fedinterestrate.htm