Importance of Stewardship

The past few weeks has been brutal for an investor. Last Monday's 777 point loss and the tumultous rest of the week was enough to make even the most veteran investor a little nervous.

What these events do show is the importance of applying christian stewardship principles in finances. What is meant by christian stewardship? This means taking the principles in the Bible and applying them to everyday life. If you follow these principles you never need to worry about a credit crisis. Here are 2 of my favorites.

Credit Card: Never have a balance that you carry forward into the next month!!!!! Paying 20% interest is always a bad strategy. If you can not pay it off each month, cut it up. Do not let a credit card company control your actions.

Personal Auto Loan: A depreciating object such as a car is a liability not an asset. The loan balance will be worth more than car which means that if you turn in the car during the loan period you will also be paying to get out of the loan. You pay interest and fees to get the loan and then pay more money to get out of the loan. The better solution is to save for the vehicle to avoid getting a loan and buy a car that is 2 years old or older to avoid the steepest part of the depreciation curve.

If you live with minimal need for credit you will sleep better at night. In the past, I was guilty of these 2 mistakes. A little upfront effort can avoid sleepless nights.

Credit Cards and College Students

My daughter just graduated from high school and is preparing for college this fall where she will be a full time undergraduate student. Many are in this same situation.

The question we looked at was should she have a credit card? Here is the research we found in Volume 6 of the Journal of Personal Finance:

1. In 2003, credit cards are used by about 1/3rd of Americans age 18 and 19.
2. In 2004, one credit card is held by at least 70% of college students.
3. In 2001, 47% of undergraduate had 4 credit cards or more.
4. In 2001, 21% had balances between $3,0000 - $7,000.

I am sure these numbers have grown with time. Consequences for undergraduate students with credit card debt:

• Students feel forced to put jobs ahead of school to keep up with payments (notice not being able to pay off each month and having to make payments).
• Students who had an academic hearing often mentioned working multiple jobs to pay on debts as reasons for poor academic performance. The end result for some is dropping out of school, delaying graduate school, etc.
• This can lead to a poor credit rating and put the student in a more difficult financial position. The key justification given by a credit card issuer is "it is important for the student to establish a credit rating." Having a good credit rating is never stated.
• Having a poor credit rating leads to difficulty in obtaining future loans.

The bottom line is a credit card should be used by college student who has shown financial discipline. If financial discipline does not exist delay getting a credit card and use a debit card. A debit card is a good tool to teach financial discipline without having long term financial consequences.

My daughter went to a bank, with a branch in the town she is attending college, to open an account. The bank had a program for students that included a saving accounnt, checking account, debit card, and a credit card. She is now fully equipped to spend money.

What is she doing with this new found financial freedom? She is going to keep the debit card and cancel the credit card. The strategy is to use the debit card through undergraduate school and start using a credit card after graduation.

The next blog will show the 3 credit card offers and pitfalls of using any of these cards.