Credit card borrowing basics?

July 12, 2005 12:47 AM

A friend in college is very anxious to get a loan for around $5-6000. Neither of us knows anything about credit cards, so I'm asking for some advice on her behalf. (*and yeah, this question seems pretty basic, so sorry if I missed it being asked already)

The expense in question is something that most credit companies would call a luxury, although it means a lot ot her. We haven't seen her credit report, but her credit is probably either nonexistent or sort of bad (she's behind in paying some loans for college). She doesn't have a job at present - she intends to get one soon, but she's anxious to get the loan process underway asap.

From all I've read, I'm assuming credit cards are the best option. But which credit card, and how does she begin?

posted by jsbww to work & money (14 comments total)

Somebody without a job, and presumably without an income, is trying to get a loan? It doesn't answer the question, but even if she can get a loan, she shouldn't get a loan. Borrowing, especially for something that isn't absolutely essential, without the means to repay, is trouble. Using credit cards in that situation is even worse, because the charges will quickly start to snowball.

Sorry if that seems sanctimonious.
posted by veedubya at 12:53 AM on July 12, 2005

Was she offered any of the federal loans such as PLUS which her parents can take out for her or...(I can't remember the one I have and my school won't let me access my FA acct.)?

I really wouldn't recommend doing it through a credit card company. She should try asking banks for student loans. They usually have better rates too.
posted by state fxn at 1:52 AM on July 12, 2005

Just to build on veedubya's comment, when I had to make a move to a big new city fresh out of college for a job, I had to pay a huge downpayment on a place and first and last month's rent, plus all moving expenses. I borrowed $4k on a card as a cash advance and since the card had some other purchases on it, I soon learned that the company charged not only a higher rate for the cash advance, but that very little of it was paid off until the other purchases on normal credit were taken care of first. So that $4k sat practically untouched on my balance at a crazy high rate for years while I paid the rest off.

Suffice to say that even with a spouse and full time jobs, it took us about five years to finally pay off that stupid card. I probably ended up paying almost twice as much for the money, when you factor in years of higher interest.

Borrowing money on a credit card was the worst financial mistake I ever made in my 20s.
posted by mathowie at 1:54 AM on July 12, 2005

Try some of these links and see which one works for her. Of course go to the school's financial aid office and ask them. They can probably give some sound advice.

Sallie Mae
Stafford loan
Federal Student Aid website. Go down to "Federal Student Aid Programs" (Sorry I don't know how to link to an internal section of a page)
the Education Fund

Just a few to get you start exploring. =) Best of luck!
posted by state fxn at 2:03 AM on July 12, 2005

I'm going to join the voices that are telling you/her not to do this. I'm trying to imagine what this "expense in question" could be, and the non-school related expense that I can think of where I would tell her to go ahead and do it is a car.

If it is a car, she should seek out her local credit union and try to get a car loan -- which should be easier than other types of loans since she has collateral (the car).

Credit cards are a huge, huge trap, and one that she'll regret falling into when she graduates and find that not only does she have student loans to pay off, but she also now has this other albatross around her neck.

If she can get a "no interest on purchases for one year" card, and IF she is sure she can pay back the $6000 in the next twelve months (i.e. making a payment of $500 every single month for 12 months), then that might work -- it is sometimes possible to beat the card companies at their own game and get something for nothing. However, be aware that even if she finds and is approved for a 12-months-no-interest deal, if she pays off the card even one day late, she'll be hit with all the interest that has accrued over the past year.

But, again, I'd urge her not to go the credit card route, and to not, in fact, borrow any money that she doesn't have to borrow. I, like Mathowie, have been there. Just finished paying off enormous amounts of credit card debt from college in the past couple months. That debt, and the problems I had managing it when I was fresh out of college and poor, almost kept me from buying this house. Whatever this 'luxury' is, is it that important?
posted by anastasiav at 6:02 AM on July 12, 2005

Just adding another voice to the "bad idea" answer, in case your friend is still on the fence.
posted by mkultra at 6:55 AM on July 12, 2005

I echo all the others who say "don't do it."

The other thing I want to say might sound unsympathetic and crotchety, and to soften my remarks I want to preface them by saying I'm only 25 and I just finished grad school, so I know what it's like to be an impoverished student.

Anyway- I was going to say, if it's a so-called "luxury" item (regardless of its personal importance, it's not groceries or rent) like you say it is, can't your friend do without it for a little while? Why risk going into years of debt for something other than groceries, rent, healthcare expenses, or those other live-or-die types of necessities?

I hate sounding like one of those "kids these days!" people but sheesh- college is SUPPOSED to be about tattered clothes and ramen and Carlo Rossi wine because you can't afford anything better... not credit card debt on things you shouldn't be buying anyway.

Fuck MBNA, man.
posted by elisabeth r at 7:17 AM on July 12, 2005

BTW, the fact that the thing-to-be-bought is deliberately not named should be speaking volumes to you. If you can't say to someone with a straight face that "I took out a loan to buy X", you shouldn't do it.
posted by mkultra at 7:40 AM on July 12, 2005

Putting aside the should/shouldn't issue, this thing which is "something that most credit companies would call a luxury, although it means a lot ot her" that will be an outlay of 5000-6000 will in fact cost her more like 8000 by the time it's over. Go to this link and run some numbers. Let's call it 14% interest (which would in fact be great for an unsecured loan of that amount) paying $125 a month.

Annual Percent Rate (APR): 14%
Total Purchase Amount: $6,000
Amount You Plan to Pay Per Month: $125
Monthly Percentage Rate: 1.17%
Time to Pay Off: 5 years, 11 months
Avg. Monthly Finance Charge: $40.11
Total Finance Charge: $2,847.56
Total Cost of Item: $8,847.56

So whatever this purchase is (*) it is NOT a 6k purchase, it's a 9k purchase when you finance it. So she should just think of it that way from day one because that's the REAL cost.

Okay, now the moralizing.

Personally, and I am sure I will anger someone by saying it, I think credit is for suckers. You're paying someone a huge premium (particularly in a case like this where it's going to be the minimum payment for the forseeable future) because you can't have some patience and save up for it ahead of time. More importantly, you lose not only that extra money you pay in interest but the INVESTMENT value of that money, both in practical terms (it could be earning 3% FOR YOU somewhere like IngDirect.com) and in impractical terms: those interest payments will keep you from taking the vacation you want, buying the beer you would like, living in the apartment you'd prefer, etc.

In almost every case, luxury items purchased on credit cards will be gone (or at least no longer a thrill to have) before the payments are.

* Young woman, 5k purchase, luxury that "means a lot to her" and she's willing to finance it - is this for new tits? I like tits but credit is a weight around your neck that will keep you from doing things you want to do - they're not worth it. Buy a padded bra.
posted by phearlez at 8:31 AM on July 12, 2005

If she's determined - and lord knows I was determined to spend money I didn't have in my early 20s - go over to Art of Credit and read some of the "Essentials" material on checking and improving her credit report.

Considering taking a loan of that amount without checking her FICO and getting the best rate is even MORE nuts. In the western states you can get a free report now and in the east on Sep 1. Additionally, several of the Big Three don't -check- if you claim you were denied credit or employment and deserve a free report. So theoretically you could claim you were denied employment at XYZ Corp because of your report and get one free.

Actually, fuck theoretically: do it! Feel free to lie from here to next week to get it - it's YOUR DATA and the CRAs have been forced every step of the way to be fair in their data retention and correction. They ought to have to let us look at it CONSTANTLY for free.
posted by phearlez at 8:40 AM on July 12, 2005

I hope people are still reading this... I haven't been able to get on the internet all day. I really appreciate all the responses. Don't worry about being sanctimonious, you're all absolutely right, and if I could talk her out of this, I would - but believe me, I can't.

I just have a few questions.

State fxn - are you saying that the federal government offers students loans for non-college expenses? Loans that wouldn't already be included in her fin aid package by default?

Phearlez - I'm sure she would gladly spend $9000 and more for this item, as long as she could pay it off gradually. She is convinced that it would make her so happy that she wouldn't mind giving all of her income for years to come, for the sake of making this purchase immediately.

To all the other naysayers, which I guess is everyone - like I said, I agree. I've tried to talk her out of it, but she won't budge. She is depressed, and believes that making this purchase in the next few months will mean the difference between happiness and throwing away the last few of the "best years of her life."

No, it's not a car, bigger breasts, or anything cosmetic - the reason she doesn't want to name it is because it's very personal - which 1) makes it hard to explain to people why it means so much to her and 2) could identify her to certain people if I divulged it.

Yes, it all sounds sketchy, but at this point, I actually wonder if this might be her only route to happiness - if only because she's so single-minded about it that she won't try her best to be happy until she has it. And frankly that's beside the point, because she's not budging, and the best way I can help her at this point is to make sure she gets burned as little as possible.
posted by jsbww at 4:04 PM on July 12, 2005

If she's depressed she should seek help for her depression. I dealt with depression in my mid 20s and in my case I saw the solution as another person, not something I could purchase. Maybe just as well - there I was just rejected rather than saddled with what can be crippling debt (I did that as a seperate exercise) and yeah, it CAN be crippling - enough of an obligation and it becomes a part of your daily life, impacting what you can do that day and the next and closing off your life to all kind of opportunities.

I know what it is to be depressed and see something as The Solution. But it's a McGuffin - external things, barring amazing lottery-level luck, do not solve depression, particularly if it's chemical. She needs to deal with the root of the problem.

If she's depressed, unemployed and uninsured she should drop the $100 out of pocket to see a shrink and be assessed for anti-depressants. Prozac/floxetine is under $20 for a 3 month supply now that it's available in a generic and therefor easily affordable even if you have to pay cash.

If this sounds extreme, I think it's no less so than taking a 6k loan at a time when she can't pay it back. That $9,000 figure is a bargain compared to what it could cost her if she defaults. Default on a card these days and you pay $29 every month in late charges, 25% for interest and when you get sued and a judgement against you (and for 5k+ they WILL sue you) that could end up costing over 20k before it's paid for.

All that aside, do not kid youself. The only way you can help her get burned as little as possible is to not help her with this fool's venture at all. Help her get treated for her depression. There's no way someone with no means of support can go 5k into debt with no means for paying it back and come out of it well and you're not doing someone a favor if you help them execute a reckless and dangerous plan in the best possible way. It's still reckless and dangerous.

At the time I knew I was depressed, sought talk therapy and did it for months with no help. I resisted the Magic Pill because I didn't want To Be Dependant On Medication. I finally accepted that I needed them when a professor who knew I was having issues with depression asked me "If you were a diabetic you'd take your insulin, wouldn't you? So take the damned pills." Maybe for your friend it'll be being told that she's chasing a solution in the wrong way and that you are so sure of it you won't be a part of helping her fuck up her life but you'll help her with solving the real problem. Even if it isn't, don't be a party to something you know is a mistake.
posted by phearlez at 4:31 PM on July 12, 2005

phearlez - thanks for all your advice, it's really helpful. She's already on meds, and they help her to a degree, but they're not a silver bullet. And the problem isn't that she's taking the wrong meds - she's taken several already, and these have definitely been the most effective.

She's seen therapists before, and is scheduled to see another one next week -- but she's admitted to me that she hasn't really put her all into the therapy in the past, because she's felt that it's a lost cause. The only thing that will give her hope, she says, is this purchase.

Short of getting her institutionalized, I don't see how I can get her out of this mindset. You can lead a horse to water, and all that. Basically, she'll do therapy, but she'll be halfhearted about it unless she feels that there's real hope in sight, which to her is embodied in this thing she wants to buy.
posted by jsbww at 5:05 PM on July 12, 2005

Sorry to be checking in so late. I am a night person.

Once you have your loan, nobody checks what you do with it. She can certainly try applying for a federal loan. But if it wasn't part of her FA package...I don't think the chances are that great because there are strict requirements that the school usually follows when they put together the FA package. Getting a private student loan from a bank would be the next best option. Just don't do the credit card thing.

When I first posted a response last night, my eyes totally skipped over the word "luxury." I didn't understand why everyone was so against getting a loan to buy something, especially in college.

Anyway, I'm sorry that as a friend you are in such a hard place. I think everybody made pretty good arguments, but I'm guessing that now you are at the point of choosing the lesser of the two evils so that she doesn't get hit so hard once she recovers. I'm not going to give unsolicited advice about your friend since it's none of my business (read: I don't want to intrude) and also it sounds like you are a good friend with a good head on your shoulders.

Best of luck to you both! If you need anymore info or...anything, you know where to go. =)
posted by state fxn at 12:52 AM on July 13, 2005