During your first semester at Georgetown College you apply for a credit card with the idea that having your own credit card would be important for “emergency situations” as well as another good way to assert your independence.  After all, everyone says that having a credit card in your name is how to establish a credit history!

You spend the next four years busily juggling classes and extracurricular activities, even managing to squeeze in a few hours of work each week in an on-campus job.  Things have come up though – expenses you didn’t consider…the need for late-night pizzas which are fuel to keep you going for the all-night studying, your roommate’s 21st birthday celebration, the extra textbook your professor recommended, the occasional oil-changes for your car, and, well, the bookstore did have some great sales on sweatshirts and these make great gifts for the family. 

Thank goodness you had that credit card to help out with these little expenses and unforeseen costs!  You even get a second card (with introductory low-interest, of course) to use after the first one maxes out at $1,000.  You’ve been able to manage the minimum payments due each month and have never been late making your payment.  No problems.  Everything’s cool and under control.

Graduation

As graduation looms on the horizon, you begin looking for your first professional job.  You’ve worked hard and deserve a great career!  Not only do you deserve a good job, you need a good job because you know those student loan payments are going to kick in six months after you graduate. 

Oh, yes, and there are those credit card payments – they are relatively small though and shouldn’t be that difficult to cover, even though your credit card debt is now approaching $3,000 (which is the average monthly credit card balance for undergraduate college students nationally). 

Of course, you’re planning on getting your own apartment and maybe get a roommate to cut the costs.  Your old car that you’ve been driving for the past four years is just about paid off, though, and that’s a good thing.  You’ll be able to use that money you’ve been spending for car payments and put it toward the credit card. You have a reasonable plan.

On Your Own: Payments

You graduate and…REALITY HITS.  Your first salary isn’t quite the $30,000 you’d hoped to make in your entry-level position, but it’s not that far off -- $24,000 (before taxes) was the best you could find with your undergraduate degree and the current job market.

You’ve got a decent apartment; when you split the rent and utilities with a roommate, it runs about $450 each month. 

The car payments, plus insurance, gas, and maintenance is $400 a month because the transmission on your old car went out right after you finished paying it off.  The car, although now fully paid off, was not worth repairing, and you needed something you could rely on to get you to and from work. 

Also, you got the letter from the federal government informing you that it is time to begin paying back your student loan.  Even with a graduated payment plan, your loan payments on your total $15,000 student loan will be about $200 each month. 

Oh, yes, and then there are your basic living expenses – food, eating out, laundry, your cell phone, and other miscellaneous fluctuating expenses that come up here and there –your living expenses totaled about $450 -$750 every month.  Phew!  You never realized that eating out for lunch each day, even if it is only fast food, could add up so quickly! 

And then…there are your credit card bills, totaling about $3,000.  These payments, with an average of 16.9 % interest, require a minimum monthly payment of $50. 

Gosh, you’ve been paying on these a long time…when are these balances going to return to zero??!!  Why is it that the “Amount Owed” box on your bill hardly budges? Except for that wedding gift you gave to your best friend from college, you haven’t really used those cards much since graduation. All in all, you realize that your monthly financial outflow, representing a very average life-style, is around $1800…or a total of $21,600 every year.  However, that $24,000 salary you’re making is before taxes, and does not represent any additional investments you had wanted to start. Oh, no wonder you’ve struggled to keep your checkbook balanced each month! 

To top it all off, you met the person of your dreams and wanted to get married, but he/she also has student loans, credit card debt, and salary similar to yours.  Until you find a better-paying job, you find yourself in need of taking a second weekend job.  You can’t afford to sell your car and suffer the depreciation, and you can’t move to a cheaper apartment because you’ve signed a lease…and there is NO WAY you’re going to move back home!

Beginning your lives together this way, you both realize, is not a good way to start a marriage.  And besides, even with each sets of parents helping with many of the typical wedding-related costs, a wedding and honeymoon are very expensive.  All in all, you and your fiancé would need to come up with several thousand dollars to get married, go on a modest honeymoon, and move into your first apartment.     

You and your fiancé are not in outrageous debt…you are the average.

Could Your Story Have Had a Better Outcome? 

Consider that: 

(1)  There is little evidence to suggest that you could have reduced your student loan debt because the average student loan debt (including those who attend less expensive state universities) hovers around $12,000. 

(2)  No one has much control over the basic costs of living or average salaries because these expenses are largely determined by the nation’s economy. 

(3)  You could have bought another used car instead of a new one after your old one “died” and thus reduced both the car payments and insurance fees, but your maintenance and repair bill on a used car may have increased. 

Credit Card Debt Avoidance  

What you could have done to make a drastic difference, however, is to have avoided credit card debt.  Not convinced?  Read on… 

If you make the minimum monthly payment of $50.00 on that $3,000 debt you owe (at the national average interest rate of 16.9%), it will take you 11 years and 2 months to pay off the debt --  you will wind up paying $3,665.29 in interest on top of the debt as well. 

Bottom line?  Using those credit cards while you were a student at Georgetown College cost you $6,665.29 – which perhaps would have been enough to get you and your fiancé the good start that you needed.    

If you had not used those credit cards and invested the $3,665.29 interest charges incurred by your debt in a simple Roth IRA (or other similar-type investment), never added a single penny to the IRA, and just let that money be until retirement (at age 67, 45 years later), your investment (at an 8% average yearly return) would be worth…

Well, how about you figuring this out?  

--Click on the link below

--Type in today’s date (ex:  09-15-02)

--Type in the same date 45 years later (ex:  09-15-47)

--Put $3,665.29 for the initial investment (your credit card interest payments)

--Type in 8% for the return on a YEARLY basis (not monthly)

--Hit CALCULATE

http://www.tcalc.com/tvwww.dll?User?Tmplt=fv.htm&Cstm=customcalculator 

1.  How much $$ will be the return on your investment in 45 years?

2.  Are you surprised at this result?

3.  How does this information change the way you think about getting and using credit cards while you are a student at Georgetown College? 

4.  Discuss your findings and reactions in your FS journal assignment.