A Generation of Plastic Babies!

I was reading some of Kevin Rosen’s articles, columnist for the Kansas City Star. He writes high quality columns about kids and money on a regular basis. However, one of his recent articles has drawn a lot of heat. In the article, Kevin made the following statement:

“Wouldn’t it be nice if our children grew into adulthood in a world without credit cards? Look at all the problems that would be solved in a cash-and-carry society — no gut-wrenching debt overloads, no junk mail from credit card issuers, and perhaps most important, fewer opportunities for cyber thieves to steal our identities.”

It’s an interesting idea - could your children live without credit cards? Do you wish society didn’t have credit cards? I’m positive that banks and credit card companies would fight you tooth and nail.

I was raised by “children of the depression”. I was taught that if we didn’t have the money, don’t even think about asking for it! You certainly won’t get in financial trouble. I have tried to live up to this, but I never thought I would see our society in such overwhelming indebtedness due credit cards. The truly sad part is that Americans carry the mindset that if they don’t have those little plastic cards, then they have no clout. Do you leave home without your American Express Card?

If you have a child who has graduated from high school then you can remember all those gifts that came in the mail from credit card companies. My daughter received two dozen or more. We agreed that one card with a limit of $300 would suffice for extreme emergencies. But the number of graduates to fell into the plastic trap is astounding and unfortunately some of them are still paying the price, along with those never ending student loan payments.

A group of Maryland bankers are visiting high schools in an effort to teach students to be credit smart. Check out the video.

After reading various reports by student loan providers who surveyed graduate-school students about credit-card usage, I believe that we now have a “generation of plastic babies”. Among other things, the report found that 93 percent of these highly educated students try to pay at least the minimum monthly requirement, but only 20 percent acknowledged paying off their credit card bills in full each month.

But you know the old saying, children learn by example. Take a look at the example these children have learned from in the past courtesy of Credit Counseling Biz:

	It is estimated that, on average, 20% of Americans have “maxed out” their credit cards.
	About 25% of adults in the United States have a history of credit problems.
	Americans’ average credit card debt is $8400 per household.
	Roughly 24% of personal expenditures in the United States are made using bank credit cards, retail cards, and debit cards.
	In the first quarter of 2002, total credit debt was $660 billion. Total credit card debt was approximately $60 billion.
	Approximately 185 million American consumers have at least one credit card.
	Of those 185 million consumers with credit cards, 1.3 million credit card holders declared bankruptcy in 2002.
	Americans pay, on average, an 18.9% interest rate on credit cards.
	The average household pays $83.33 in credit card interest per month.
	On average, the typical credit card purchase is 112% higher than if using cash.
	More than 40% of American families spend more than they earn. (Federal Reserve).
	As of 1995, 92% of American family disposable income is spent on paying debts, up from 65% in 1975. (Federal Reserve)
	An $8,000 debt, at a rate of 18% interest, will take over 25 years to pay off and cost more than $24,000 in the long run.

These are absolutely astounding and maddening figures, and signals a need for credit education in classrooms, but most of all, on the home front.

First and foremost, don’t even think about giving them a card until they can handle cash responsibly and have a firm understanding of the benefits and dangers of using credit cards. It also doesn’t hurt to help them set up something like an automatic withdrawal from their checking account to pay off the balance each month.

We all love the convenience and purchasing power that credit cards offer. But without the proper education, credit cards can turn into your worst nightmare and you’ll find yourself needing professional “tax help”. Let me give you my “throw it back at them” “tax debt help”.

When you find yourself unable to make that minimum payment, don’t be surprised when you get a call from the credit card company wanting to settle for pennies on the dollar. Sure, their offer sounds great at the time, “if you’ll settle with us for this amount” (normally 1/3 to ½ of the balance), “then we’ll write off the remaining balance”. What they don’t tell you is that you’ll be getting a 1099-C Cancellation of Debt at the end of the year to report to the IRS. The IRS considers the write-off amount to be reportable income, and of course, you’ll be taxed on that amount.

Be prepared for the call, when they make you that offer, before you agree, ask them if they are going to 1099-C you for the balance. If they say yes, tell them that you will agree to the payoff if they will “forgive” the remaining balance and of course get it in writing!

In the past year, I have worked with a staggering number of clients who have unfiled tax returns due in part to these high balance write-offs. Not only do they have to pay the tax on the write-offs, but, failure to file penalties compounded with interest can result in garnishments and an eventual IRS Levy. The final result could be, having to contract a Tax Resolution firm such as Effectur, Inc. to help alleviate the financial burden of the plastic. There are great non-profit credit counseling agencies such as In Charge Debt Solutions who can help you with budgeting and repairing credit problems.

As parents, it is our job to educate, protect and prepare our children for the future. They may kick, scream and yell, but let’s steer them in the right direction and make them the “plastic-less generation”.

Sharon Raines, Sr. Financial Planner/Tax Preparer