Why Millennial Students Need to Worry About Financial Grades
Posted By Terri Williams on February 19, 2016 at 9:46 am
Most college students understand the importance of earning good grades in the classroom. However, many of them may not grasp the significance of earning good – or even respectable – financial grades, and their careless actions could haunt them for years.
According to a recent Credit Karma and Qualtrics survey of over 1,000 Americans between the ages of 31 and 44, most respondents made at least one major, avoidable, financial blunder before the age of 30.
Key results from the survey:
- 68% of respondents either overspent on credit cards, missed payments, defaulted on a loan, or had an account sent to collections
- 69% said they did not fully understand credit scores when they obtained their first credit card
- 75% felt that the financial mistakes they made before the age of 30 negatively impacted their quality of life
- 61% were turned down for a credit card as a result of their mistakes
- 26% moved back home with their parents to recover from their financial mistakes
- 28% stated that they received some type of financial education before they entered college
- 83% felt that financial education could have helped them avoid their financial mistakes
Credit Karma noted that these survey results were right in line with data from the organization’s 45 million members, revealing a disturbing trend among young adults. GoodCall asked several financial experts to weigh in on the problem and offer possible solutions.
Understanding the problem
Why are credit blunders so prevalent among young adults? Dave Henderson, certified financial planner with Client One Securities in Greenwood Village, Colorado, tells GoodCall that most students leave high school totally unprepared to successfully handle money or resist the many temptations they encounter. As an example, Henderson refers to credit card companies that target college students for new cards. “You have students out on their own for the first time and suddenly there is this piece of plastic that they can use just like cash – Wow, this is great! Party at my dorm room tonight!” When the first bill arrives and the minimum payment is only $10 to $20 on a $1,000 balance, the students may find this a manageable bill, but Henderson says even if they don’t ever charge anything else on the card, they’ll be paying it off when they reach their 30th birthday.
But, young adults may simply be following the example that has been set for them. Rachel Cruze, a personal finance expert who co-authored the #1 New York Times best-selling book Smart Money Smart Kids with her father, Dave Ramsey, tells GoodCall,
“Personal finance is 80 percent behavior and 20 percent head knowledge: adults are failing with money because of the money habits they developed as children.” She explains that debt is a typical occurrence in our society because we make the mistake of thinking that we can afford an item as long as we can make the minimum monthly payment on it.
“We want what we want, and we want it now, so instead of waiting to save up cash and buy things that we can actually afford, we put ourselves at risk by taking out loans and going into credit card debt.”
And Cruze says that many college students erroneously believe that they need a credit card to build their credit. However, she says, “What they haven’t been told are the consequences and dangers of debt – they have to either pay their credit card bill in full, or make monthly payments that result in hundreds – or even thousands – of dollars in interest.”
And many of these financial problems are a result of not having a financial plan. “Most young people live their life in the moment and don’t think about how what they do in their younger years can affect the next 40 years of their life,” says Cruze.
Why your financial grade is important
A part of the failing financial grade among young adults is related to failing to understand that bad financial decisions can damage credit for years. Melissa Spickler, managing director of Merrill Lynch’s Spickler Wealth Management Group in Bloomfield Hills, Michigan, tells GoodCall, “For example, when you want to buy a home and you have bad credit, you will either not be able to get the home, may have to pay extremely high interest rates because they view you as high risk, or you will need a co-signer, such as a parent.”
And Henderson adds, “Many insurance companies use credit ratings as one of the underwriting factors when setting auto and home insurance rates.” He says that access to credit at the best rates could save thousands of dollars over a lifetime, whereas bad credit puts the consumer at a definite disadvantage.
How to turn the tide
The key to avoiding financial blunders is to have deliberate and calculated spending habits. “Young people need to make a plan for their money so they know where it’s going instead of wondering where it went,” says Cruze. Also, she says students and recent graduates should formulate a plan for paying off their debt.” It may mean taking on an extra job, making sacrifices with income, or selling some stuff; I tell people all the time, your largest wealth-building tool is your income, so you don’t want it tied up in monthly payments!”
And Spickler echoes the sentiment that young adults need a plan, and she suggests keeping a ledger of what they spend in the course of a day, a week, and a month to see where their money goes so they can manage their funds accordingly. “I may add that a coffee a day could end up being $106.00 a month or $1,300.00 a year, and that is a lot of money when living on a budget.”
Spickler believes that having young people learn to write down everything they spend could be good shock therapy. “When we charge on a credit card, it doesn’t feel like we have spent a thing compared to spending cash, so we need a sense of perspective on how much money is actually being spent.”