Credit Risks Young Military Members Face
Young military service members face enough hazards but one clear financial risk actually involves paying bills late and losing precious cash to hefty fees.
One of the more troubling parts of a recent military-related survey noted that nearly half of credit card holders in the military engage in costly practices with their plastic. Some months they could end up just paying the minimum requirement on their credit card debt. Or they pay late fees. Or worse yet, they seek extra cash by taking out a sky-high cash advance.
The latest FINRA Foundation Military Financial Capability Survey illustrates the continued challenges when it comes to protecting military borrowers. The Department of Defense has collected data on the impact of high-cost credit on service members and is expected to issue proposed rules in 2014.
The data on late fees serves as reminder during the holidays for service members, and frankly all consumers, to keep an eye on due dates and debt loads, too.
“I see a huge waste of money on late fees and over the limit fees,” said N. Susan Abentrod, a certified financial planner in Birmingham, who has counseled service members across the country and overseas.
“Often, it’s just a case of not paying attention. After all, there’s so much going on in their lives, finances simply take a back-seat.”
During the holidays, service members, like other consumers, may want to make up for lost time with family and use credit to pay for gifts, trips home, or even pick up the tab for travel costs for family to visit them.
“Gifts are bought and lavished on those they love with the very best of intentions, with no thought on the months ahead they’re going to be paying off the balance,” Abentrod said.
The FINRA survey, fortunately, had some good news: About 49% of all military respondents with credit cards said they always pay their credit card bills off in full each month.
But others, particularly younger service members, could be lulled into a false sense of security with their spending because they’re receiving a regular paycheck, maybe the first real pay they’ve ever had. And they suddenly find that credit is easy to get.
“They’re away from home when they’re making a lot of their first financial decisions,” said Gerri Walsh, president of the Financial Industry Regulatory Authority Investor Education Foundation.
About 57% of the military surveyed said in some months, they carried over a balance and ended up being charged interest. About 39% said in some months in the past year they made the minimum payment only, which let interest owed build and grow.
The survey noted that African-American and Latino service members engage more frequently than white counterparts in credit card practices that come with high fees and interest rates.
Fees might seem a small part of the equation but they cut into tight budgets. The average late fee is $30.97 on a credit card, according to Bankrate.com. A first offense is capped at $25 for someone who is late with a payment, but a second offense within six months is subject to a higher fee, capped at $35, according to Greg McBride, of Bankrate.com.
Fewer than 10% of cards surveyed by Bankrate.com have an over-the-limit fee if you charge more than your line of credit, according to Bankrate.com. But the average over-the-limit fee is $23.64.
Credit card debt isn’t the only concern. The FINRA survey also noted that high-cost borrowing is an issue, such as turning to rent-to-own stores, going to pawn shops to borrow and using payday advances.
The Military Lending Act offers service members some protections on some short-term loans and puts an annual interest rate cap of 36% on specific products. The products that face the limited interest rate are: Closed-end payday loans with terms of 91 days or fewer for $2,000 or less. Closed-end vehicle title loans with a term of 181 days or less for any amount. And refund anticipation loans that are closed-end and expressly paid with a tax refund.
But there are growing concerns that some very high-cost loans are still being made by going through gaps in the current rules, said Tom Feltner, director of financial services for the Consumer Federation of America.
He noted that said the rate caps don’t apply to loans that last for more than 91 days and auto-title loans with terms longer than 181 days.
Feltner said the CFA is encouraging the Department of Defense to look broadly at all the forms of credit that is marketed to service members.
The Consumer Federation of America has pointed out that “buy now-pay later options” lure young, inexperienced service members.
One soldier reportedly owed $630 a month for just furniture, at least one-third of his monthly basic pay, according to a 2012 CFA report.
As Abentrod counsels service members, she reviews past statements to explain the added cost of interest, late fees and over-limit fees.
“When I run the numbers showing the final cost of purchases it’s a real eye-opener,” she said.
What financial advice has helped you budget effectively?
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