Credit vs. Debt: Two Sides of the Same Coin

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Young people need to know how to use credit effectively. Many don't and pay a steep price to learn. Read this for some important advice about your money.

Row after row of vibrant yellow stress balls sit there, like an army of smiley-faced soldiers in line behind their clipboard-toting general. The table is strategically placed to gain maximum exposure to the passing college students. Sure, the foam ball costs only $2.99 at the drug store, but you could get it for free if you only sign up for a credit card. You don't even have to use the card, the man with the clipboard says.

Perhaps your introduction to the world of credit and debt started with an innocent exchange like this. In the United Kingdom, perhaps it came from an offer for a credit card in a magazine (http://business.timesonline.co.uk/article/0,,9555-2010273,00.html ). Or maybe the topic came up in your home after you asked about buying a car. Regardless of how the subjects entered your life, it certainly won't be the last time you deal with credit and debt.

Young adults and even teens in some countries are prime targets for credit card companies. When young people need money for education, housing, transportation and entertainment, credit card offers conveniently start arriving.

Every year in the United States, credit card applications are in plentiful supply on campuses, touting promotional introductory interest rates, instant credit approval and no annual fees. Caveats such as penalties and late fees are virtually invisible, tucked in among the fine print on credit applications. There is little warning that delinquent payments lead to a bad credit rating, which can make it difficult to rent an apartment, buy a car or, in some cases, get a job.

Sadly, these kinds of mistakes can haunt young adults for years to come. Americans have accumulated almost $11 trillion in debt, according to a September 2005 account by Associated Press reporter Eileen Alt Powell. More than $800 billion of that debt is held on outstanding credit card balances, she said, which translates to about $7,200 per U.S. household. How much is $7,200? According to the Economic Research Service of the U.S. Department of Agriculture, that amount would have been more than enough to pay the entire food bill for a family of three in the United States in 2002 (www.ers.usda.gov/Briefing/Consumption/Expenditures.htm ).

To make matters worse for these spenders, new laws that took effect in October 2005 make it harder for consumers to file for bankruptcy if they can't keep up with their credit card payments, according to Powell's report. Powell attributes this growing problem to "the nation's nearly insatiable appetite for cheap, imported goods," and its willingness to go into debt for anything from cars and clothes to food and fun.

This "buy now, pay later" mentality could spell disaster for Americans if interest rates suddenly changed or foreign investors slowed their pace or pulled out of the American market, Powell worries. "Some analysts fear such actions could trigger doomsday scenarios in which the bills come due and Americans can't pay, with devastating consequences for the entire economy," she warns.

But not everyone paints such a gloomy picture. Mark Zandi, chief economist for Economy.com, told Powell that doomsdayers have warned that the sky is falling for many years. Instead, Zandi believes that interest rates will rise gradually, giving consumers time to adjust to higher payments. At the same time, their credit limits are likely to be lowered, he opines.

Still, lower- and middle-income families—the main demographic that has taken on most of the debt–will have a hard time maintaining their spending level and standard of living, according to Zandi.

Meanwhile, in the East

While Americans may be too eager to spend, the Japanese jump to the other ditch, according to AP reporter Yuri Kageyama. Writing from Japan, Kageyama relates a cultural tradition in which the Japanese travel to forest shrines to wash their coins and bills in trickling spring water with the belief it will multiply their wealth .

This ancient ritual reflects the Japanese view of money, Kageyama explains. "Cash—cold hard currency—is a precious, treasured commodity…something to be treated with reverence," he writes. Though Japan has the world's second-largest economy, its citizens have a cautious, almost fearful attitude toward debt, according to Kageyama. This mind-set makes the Japanese reluctant to borrow money, which has led to economic stagnation.

The statistics are telling. The Japanese have $13 trillion in assets, according to the Bank of Japan. More than 50 percent is held in cash and savings, while only 9 percent is invested in stocks. By comparison, Americans have $36.5 trillion in assets, with only 13 percent in cash and savings and 34 percent in stocks.

While Japan's population is half that of the United States, Americans have 23 times more credit card debt, according to Kageyama. Only 8 percent of purchases in Japan are made with a credit card.

Finding a balance

While Japan stubbornly resists overtures from credit card companies, many in America have found themselves, willingly or of necessity, caught in a vortex of debt. The lamentable result can be found in Proverbs:22:7, which reads, "The rich rules over the poor, and the borrower is servant to the lender."

No matter where we live, wise use of credit cards is critical to achieving financial stability and a comfortable life. Consider these points as you enter the world of credit:

  • Educate yourself on the subjects of credit and debt management. Learn the terminology. Understand the processes and responsibilities. Read the fine print. When it's time to borrow, there should be few surprises. For a good overview of the basics, request the United Church of God's free booklet, Managing Your Finances .
  • Develop a financial plan or budget. Use the sample worksheet in the above-mentioned booklet (page 24) to get a clear picture of your financial condition. If deficits appear, take immediate steps (if possible) to increase income or reduce expenses. If need be, consult a credit counseling agency.
  • Analyze how decisions made today will impact your life in the long run. The free booklet Making Life Work contains many guidelines for making life's important decisions.
  • Develop self-discipline. Learn to say "no"—to the lures of tantalizing advertising and to yourself. Then stick to that resolve.
  • If at all possible, pay off your credit cards in full every month. By doing so, for many cards you can avoid finance charges.
  • Make saving a habit, even if it's only $5 a paycheck. Life is full of the unexpected, and having a reserve helps to take the pressure off.
  • Pray for God's help and guidance before making financial decisions. After all, He is the one who gives us the "power to get wealth" (Deuteronomy:8:17-18). VT

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