Brooklyn Norton never imagined she would get in over her head. The 23-year-old from Pima Ariz. only wanted to use her new credit card to help get her started in her new business venture selling Mary Kay products. She would sell her inventory, pay off her debt and run the business from her personal checking account.

But sales didn't come.

Soon, Norton found herself with increasing needs and easy access to a $9,000 credit line that the bank had offered on her first credit card. The debt kept piling up until Norton could not handle it anymore. She began withdrawing cash from her credit card just to make her minimum monthly payments. She dropped out of BYU and moved back home to minimize expenses as she paid off her debt.

Norton's story is not uncommon. The U.S. Census Bureau reports that Americans owed more than $800 billion dollars in credit card debt in 2005. After adjusting for inflation, that number means a 245 percent increase since 1970, when credit cards were just barely gaining wide acceptance.

Many students may be enticed by the idea of getting something now and paying for it later, but students should remember that using a credit card is the same as taking out a loan for a car or a house, said Brent Wilson, a professor of finance in the Marriott School of Business.

"Credit cards are a way to gratify your desires at the moment and pay for it in the future," he said.

A credit card is merely a twist on an idea as old as banking, Wilson said. People with money deposit into the bank with the promise that they will gain interest. The bank loans that money to others with the requirement that they pay back with interest. A credit card allows users to simply take out a loan at the point of purchase.

The difference between credit cards and traditional loans is that credit card spending has no collateral to back up the loan. That is how banks justify interest rates as high as 35 percent, Wilson said. However, that interest is only paid if cardholders do not pay their bill in full every month.

"If you are at all a credit risk, they will make money off of you," he said.

But banks and the companies that facilitate transactions, such as Visa or American Express, make money even if the bill is paid in full every month. That's because these entities charge merchants a fee anywhere from one to three percent of the transaction, according to indexcreditcards.com. Occasionally, these charges are passed on to the consumer, as transaction fees for using a card at a gas station, but merchants generally eat the cost in the interest of enticing customers.

"The advantage of a credit card is that it facilitates purchases," Wilson said. "So if you have a credit card, it's easier to buy things. That's why merchants like it."

Craig Israelsen, a professor in the School of Family Life who teaches a family finance class, said credit cards are not necessarily bad. Instead, a credit card can make purchasing necessities and reasonable wants much more convenient, he said. Rewards programs can even save credit card users money on flights, meals and vacations.

"A credit card can be a total win if used wisely," he said. However, families and individuals should exercise caution whenever they use a credit card.

Israelsen compares the use of a credit card to running a marathon.

"You need to pace your energy appropriately for the length of the whole race," he said. "If a person uses a credit card as if it's a 5k race when it's really a marathon, they can run into a dilemma."

That dilemma extends to others when cardholders do not pay, forcing lending companies to increase interest rates and transaction fees, Israelsen said.

"In the end I don't care what you use your money for as long as you're honest and take care of your responsibilities," he said. "If you go bankrupt, now I do care because it costs me."

Israelsen offered three simple tips to those using a credit card.

First, cardholders should use a monthly budget, and in that budget record all credit card transactions just as if it were a made with a check or cash. Recognizing a credit card transaction as an actual expenditure can help control impulse spending.

Second, when the budget reaches zero, the consumer should quit spending.

"This is a convenience, not an open-ended loan," Israelsen said.

Lastly, consumers should learn early to save for something they want to buy, and wait until they have the money.

Brooklyn Norton said she wishes someone had taught her that lesson before she began using her credit card.

"If you don't have the money to pay for something, I just recommend not buying the thing," she said.



Copyright Brigham Young University 21 Oct 2008