|Image credit: iqoncept / 123RF Stock Photo|
A close family member (let’s call him “B”) mentioned that he recently opened a new credit card through his bank. He already had a Discover card, but thought that he should have something more widely accepted as some retailers do not take Discover. This approach seemed logical, until B said this: “The bank gave me a $7,500 credit line. And, there is a promotional 0% APR for the first 12 months.” He seemed excited by the high credit line and the promotional interest-free period, but I was concerned. This family member is very bright. In most situations, he’s practical and has plenty of common sense. However, I worry that he may be setting a dangerous financial precedent if he starts to rely on credit. Here are some background details that cause me to worry:
*B and his wife are 24-year old newlyweds. He financed the engagement ring. According to the jeweler’s website, loans are interest-free if paid in full within 12 months. If the loan is not paid in full within 12 months, interest accrues from the purchase date at an APR of 29.99% (oh boy...) I don't know whether he paid off the loan within 12 months, but I sincerely hope he did. That’s a super high interest rate. The ring is quite lovely, by the way. But I just don’t think it’s a good idea to buy a ring unless you can afford to pay for it in cash.
*B and his wife just finished Master’s degrees. While in graduate school, they both had part-time positions as graduate assistants/researchers, but never held full-time jobs. I estimate that B and his wife each earned $15,000-$18,000 a year as researchers. Given these modest incomes...
*I don’t believe B has much in savings. I could be wrong, but I doubt he would have financed the engagement ring if he’d had the cash to spend.
*B will start medical school in a few weeks. Over the next four years, he will take out six figures in loans.
*B’s wife is currently seeking employment (until recently, he had been deciding between a few medical schools. The medical schools were in different locations, and B’s wife waited to apply for jobs until he had decided on a medical school)
*A $7,500 credit line?!!! Someone can get themselves into a lot of trouble with a $7,500 credit line, especially if he/she does not have a source of income.
I have an uneasy feeling that B and his wife may get in over their heads with this new credit card. I inwardly cringed during this conversation because I would hate to see B and his wife make a financial mistake that could haunt them for years. Perhaps I am being paranoid and should give them more credit (bad pun, I know). They’re adults and are capable of making their own decisions. When B told me about the new credit card, I decided not to offer him any advice. We were in a social setting with his parents and I didn’t think it was an appropriate moment to climb onto my soap box. I had to resist the urge to tell B what I really thought: 1) Credit cards should be used as if they are debit cards; only make the purchase if you could afford to buy it in cash, 2) Pay off that balance in full, every month, even if there is an interest-free period. It’s not as though you could leverage credit to your benefit in this scenario, so you’re better off paying your bills, and 3) a $7,500 credit line for an unemployed person seems like predatory lending on the part of the bank. Be very, very careful whenever you use that credit. The bank is counting on you NOT being able to pay your balance after 12 months, at which point they’ll slam you with a very high interest rate.
I wanted to say all those things. Really, I did. But I thought this might sound too preachy and judgmental. B was simply making conversation. He hadn’t asked my opinion, so I didn’t feel it was my place to offer advice, especially with his parents standing nearby. Instead, I said, “Wow -- $7,500? That’s higher than my credit line!” I am hoping that my comment will put his high credit line in perspective. His parents are both financially savvy, so I imagine that they taught him about credit cards when he was younger. If not, I’m hoping they will warn him after hearing this worrisome conversation.
So, friends, here’s my question: Have you ever offered unsolicited financial advice to a friend or family member? If so, how was it received? Do you think I should have said something more forceful in this situation?