First Credit Card Confusion: Read the Fine Print - Financial Literacy

When Dylan/Dina Brown goes away to college, he applies for his first credit card at the freshman orientation fair on campus.  Dylan feels good about the way he has handled his debit card in high school and is confident that he can manage a credit card responsibly. The card he chooses offers the coolest T-shirt, the lowest interest rate, and the university’s prestigious logo imprinted on the card.

On the application, Dylan reports his income as $500 a week, based on his hourly rate and commission at his summer job as a sales rep for Nike. Because Dylan saves his money and has a full-ride academic scholarship, he doesn’t have to work during the school year.  He uses his new credit card only for recurring, automatic payments and Amazon purchases.

Everything changes in the second semester of his freshman year  when he – and 11 other students in his dormitory – are hospitalized with bacterial meningitis College students living in dormitories – typically, freshmen – are at higher risk for this serious illness. Because the disease occurs suddenly and progresses rapidly, all of the students are immediately hospitalized.

Dylan becomes so ill that he has to take some incompletes for classes he can’t finish. In the meantime, he loses his scholarship. He tells his friends that the only way he can stay in school is to use credit.  After all, his Dad told him to use his credit card only for emergencies, and this is an emergency.  He remembers how easy it was as a freshman to get a credit card, so he looks into getting two more cards

Dylan chooses a card that starts with a 0 percent interest rate for the first six months. He overlooks the fine print that says the APR goes to 22% in the seventh month.  He also gets a card that doesn’t have a fee for balance transfers. In the fine print, he misses the notice that the credit card company charges 3% of the amount transferred.  He uses both of these offers.

By the end of the school year, after charging tuition, books, living expenses and spring break, he wakes up to the fact that he has $30,000 on his charge cards that he can’t begin to pay off.  He files for bankruptcy under Chapter 7 of the Bankruptcy Code (liquidation).

At his Section 341 meeting, where he is questioned by an attorney for the creditors – all of which are owned by the same bank – Dylan says he filled in the income category of his college card based his pay at Nike after he graduated from high school. The credit card company reviews Dylan’s application and files a nondischargeability action against him alleging that he had made a false representation of this income on the application.  Dylan doesn’t know how this happened to him. 

Discharge: A release of a debtor from personal liability for certain dischargeable debts. A discharge releases a debtor from personal liability for certain debts known as dischargeable debts and prevents the creditors owed those debts from taking any action against the debtor or the debtor's property to collect the debts. The discharge also prohibits creditors from communicating with the debtor regarding the debt, including by e-mail, phone, letters, or personal contact.

341 Meeting: A meeting of creditors at which the debtor is questioned under oath by creditors, a trustee an examiner, or the U.S. Trustee about his or her financial affairs.

Discussion Starter Questions

The scenario and questions are meant to stimulate critical thinking and discussions about life decisions that may put young people on the path to bankruptcy court.

1. List Dylan’s/Dina’s needs versus wants in this scenario. How could these wants be managed to prevent a financial crisis?
2. Identify some decision points at which Dylan/Dina made his/her financial situation worse.  How could he/she have handled each of these turning points differently?
3. What safeguards should Dylan/Dina have put in place to protect his/her financial stability — and avoid the risk of facing bankruptcy?
4. What are some financial setbacks/surprises that Dylan/Dina should anticipate and prepare for in his/her teens, 20s and 30s?
5. When Dylan/Dina realizes he/she is in trouble, what are some steps to take to put on the brakes?
6. What are some factors a judge may consider when deciding whether Dylan/Dina will keep his/her vehicle (motorcycle, truck, and car)?
7. Given this scenario, can student loans forgiven?
8. What kinds of debts cannot be discharged?
9. What are some of the short-term and long-term impacts on someone’s professional and personal life that stem from filing for bankruptcy protection?
10. What are some typical, student spending habits that can put someone’s future in jeopardy?

Examples of Responses to Discussion Starter Questions

The general approach taken in these responses can be used with each of the scenarios.  The boldface type identifies the point of each question.  

1. Needs v. Wants. Using this scenario as a springboard for differentiating between basic needs and wants, students are asked to identify both. Among the needs that students are likely to find in any scenario are rent, transportation, basic living expenses and financial obligations, including student loans, car payments, and monthly bills.
   
   The protagonist’s wants are easy to identify. Some of the ways to manage finances and prevent a financial meltdown include creating and maintaining a budget, building in spending for entertainment and travel, etc.  The protagonist also could have scaled down her current spending and set short-term and long-term financial goals.
    
2. Decision Points. Some points at which protagonists can make their financial situation worse include the following:
   1. Deciding to buy everything, or to buy expensive items all at once, rather than developing a scaled-down, incremental plan;
   2. Putting optional expenses on a credit card;
   3. Charging more than what could easily pay off in one billing cycle;
   4. Accumulating too many credit cards;
   5. Maxing out the credit card limits; and
   6. Only making the minimum monthly payment on each card.
       
3. Safeguards. To protect finances, some safeguards that could be put into place include:
   1. Establishing a budget that includes spending money;
   2. Setting up automatic savings from paychecks; 
   3. Building up a cash reserve to cover living expenses for six months to provide a safety net; and
   4. Building up an emergency fund.
       
4. Anticipation. Some financial challenges that should be anticipated and prepared for at this stage in the teen years, 20s and 30s include, saving to create an emergency found that will cover: 
   1. A long period of unemployment during job searches;
   2. Getting a job and establishing a work-appropriate wardrobe;
   3. Working part time or being under employed;
   4. Being financially self sufficient;
   5. Getting a car;
   6. Getting an apartment (deposit, plus first and last month’s rent).
       
5. Brakes. When the protagonist in the scenario realizes he/she is in financial trouble some steps can be taken to put on the brakes. They include:
   1. Cutting up credit cards but not closing accounts;
   2. Scaling down the standard of living;
   3. Getting a roommate;
   4. Getting a second job, even if it is only occasional work.
       
6. Car Debt. If it is determined that the protagonist can continue making car payments after discharging the credit card debt, the car note, sometimes, can be reinstated so that the car can be kept.
    
7. Student Loans. The protagonist, probably, will not be able to get student loans discharged. Such debts are not discharged unless the debtor can prove that repaying the student loans would impose an undue hardship on the debtor.
    
8. Nondischargeable Debts.  In addition to student loans, other debts that cannot be discharged include:  
   1. Income taxes for the three years preceding the bankruptcy filing
   2. Fraudulently incurred obligations (that is, providing a creditor, such as a credit card company, with false or incomplete financial statements)
   3. Certain domestic obligations, such as child support and alimony
   4. Debts arising from the debtor's willful and malicious injury of person or property
   5. Personal injury obligations incurred as a result of the debtor's driving while intoxicated.
       
9. Impact. 
   1. Some of the short-term results of filing for bankruptcy might include:
      1. Protection of assets from collection
      2. The establishment of a repayment plan that is less burdensome.
      3. The possibility that -- after a set number of months of reliable payments are made — the remaining debts may be discharged.
   2. Some of the long-term consequences that are less favorable might include:
      1. Bankruptcy damages a credit rating for 10 years.
      2. It also will jeopardize opportunities for renting an apartment, landing a job; getting a mortgage; or getting into a serious personal or business relationship.
          
10. Self-Awareness. Students discuss spending habits that could get them into financial trouble, e.g. using credit cards for consumables – food, cosmetics, etc.