The Debt Generation

Credit cards are hailed as convenient tools, a way to build credit and earn points or rebates. However, there is another side to credit card spending, experienced by many who pay less then their balance month after month and one that can lead to a downward spiral that is difficult to rebound from.

Generations X and Y, those aged from 14-42 are being hit the hardest. Unlike their Baby Boomer parents, they are more likely to start off their working careers already in debt. While student loans and other education related debt make up a great chunk of that for many, credit card debt is also quite high and on the rise for young people-some high-school students even have their own credit cards, something unheard of a generation ago.

So with all that money going to iPhones, PSPs, and the latest designer duds, is this generation just plain spoiled? Not so fast grandpa. Many in this generation are broke-or close to it-but the blame came be placed squarely on starting out in debt and having to struggle with high-interest rates, not on extravagant living.

According to personal finance counselor Sophia Jackson, credit card debt is an epidemic among the under-30 crowd. College students average $2,200 in balances on their plastic, says Bankrate.com. Graduate students have more than double that amount, and high interest rates translate into hefty monthly payments and long-term balances for many.

The bottom line is that most teens and young adults just don’t have the life experience needed to comprehend the implications of paying back their loans or debts when they take them on. And let’s get real for a minute, how can a 19-year-old student be expected to grok the reality of paying back thousands of dollars in college expenses when he’s buying books, food and clothes, excited about the upcoming semester, sports and college life? The numbers don’t have much basis in reality, and it’s a natural assumption to think you’ll be able to pay off the balances as soon as you graduate and land a high-paying job. Combine this with the fact that college teaches you nothing about personal finance and you’re facing a financial mess right at the start of your adult life.

Many will pay minimum payments on their loans for years, either not realizing how much is going to interest just to service the debt or simply not having anything extra to throw at the principal. With young credit, new credit or no credit, interest rates are often in the high double digits, lowering the chance of fast repayment.

Ironically, low credit scores from high debt-to-income ratios, high credit card balances and missed or late payments can affect your job and income potential. Many employers do routine credit screenings and background checks on applicants; security clearances are also in jeopardy for those with bad credit.

A weak economy further impacts your ability to repay loans. When high-paying jobs are scarce, many find themselves jobless for short periods or working lower-paying jobs than they expected. Without lifetime savings or investments, the younger generation falls into the trap of adding on more credit card debt or, at best, is only able to pay minimums on current debt and not get ahead of their bills.

Sounds pretty grim. But there is hope. The best solution is for Generation X to avoid new debt and pay off old debt as aggressively as possible, and for Generation Y to avoid the debt trap at all costs. It would be wise to put off credit card use at least until entering the workforce and becoming more familiar with personal finance, basic budgeting and personal accounting.

The young who are able to invest for retirement, rather than simply service their debts, will be in the best position for financial success. Invest what you can now, even as little as $100 a month will likely return huge dividends when you retire.

A basic understanding of personal finance, debt management, budget management and accounting will go a long way toward helping you avoid the debt trap. Learn how to manage your money and you may even leave a legacy for those generations to come.

Mint Tip: Pay your credit cards in full each month:
The average American carries $8,500 in credit card debt. At a minimum payment of $100/mo, it takes 6.7 years, and $4,257 in finance charges before you’re in the clear.