THE BLOG
02/23/2011 10:37 am ET Updated May 25, 2011

The Newly Financially Independent: Headed for Fiscal Meltdown?

Young people face an ever-increasing number of obstacles as they find themselves learning the ropes of financial independence, while also being responsible for their future, and having to build an acceptable credit rating. Things like money borrowed for school, missteps due to ignorance about money, pressure from friends to spend frivolously and the assumption that "everything will be OK" can all contribute to being stuck with a low credit rating later in life. It's essential to rise to the challenge and be disciplined, taking the long view now in order to avoid more serious troubles down the road.

We all start off ignorant

According to a study conducted by Harvard's David Laibson, it takes new credit card users time to progressively learn to anticipate the surprise fees that come with their cards. This translates to new customers, many young people and college students amongst them, getting blindsided by extra costs and paying for the perks of more experienced customers, like credit card rewards.

Student loans aren't helping

Peter Thiel, who helped start PayPal and works with hedge funds, has created a fund that will provide $100,000 to 20 currently enrolled students to drop out and start new enterprises. By Thiel's calculations, school is frequently a bad investment, words that probably ring true to many people in their early twenties who graduated from college, often in debt, and suddenly found themselves unable to stay economically afloat.

"University administrators are the equivalent of subprime mortgage brokers," he told the WSJ, since he believes that college for most young adults is not an investment decision, but a poor consumption decision. He goes on to say, "most colleges are four-year parties."

When day-to-day costs, interest rates and other variables are factored in, it will take years for a normal working American to pay off $100,000 in educational debt. On top of this difficulty, declaring oneself bankrupt often fails to alleviate this financial burden.

Outside influences and sunny assumptions

People in their twenties are, generally speaking, trying to make space for themselves in workplaces and social circles, as well as in the world of credit, and they are a population that is easily swayed by other peoples' opinions of them. In many cases, this can mean high levels of frivolous spending, buying trendy couture, having expensive nights on the town, etc.

Another culprit might be attitude rather than habit, at least according to a survey conducted by Psychology Today. According to this study, 85 percent of people in their early twenties think that they will be in a better financial position within a year, whereas only 35 percent of people above age 65 think that will happen. But whether it's outlook, external influences, or both, the belief shared by many young people that its possible to spend recklessly now without real consequences can create serious financial roadblocks a few years later.

Debt's a pretty big deal

While credit is generally not the first thing on a young person's mind as they find their place in the world, it's essential to remember that their debt history will be a factor in their lives sooner rather than later. Working on making a good start on building credit in the present will serve them well since credit comes into play with many basic purchases like renting an apartment or finding a monthly cell phone service. Later in life, purchasing a house or an automobile will also require healthy credit. On the other hand, using credit to buy fleeting pleasures now that you can't afford can make these essential expenditures difficult to manage for years to come.

Though not easy, it's definitely possible to build good credit when young. Making frequent use of credit cards, but at a responsible and re-payable level of spending, can help you build a positive credit background. According to The Ultimate Credit Card Handbook writer Gerri Detweiler, college is by far the easiest time to get a credit card. But, if you're having a tough time getting a card, consider investigating options for a secured card that requires you to deposit the equivalent of your line of credit before use, like the Capital One Secured Card. A year or more of keeping up on your bills can then move you to a traditional non-secured card.

If you have racked up more debt on your card than you can handle, look for the most lucrative option in a balance transfer card -- this can get you interest-free credit for nearly two years. But don't repeat old mistakes; consider treating this as an opportunity to build new habits by paying off your debt on the card in a timely way. Especially since the interest rate will sky-rocket after the introductory period.

Young people may have a positive outlook about their money situation right now, but too little responsibility today can create huge problems in a rather short period of time. Instead of wishing to buy wasteful items, rest easy with the knowledge that your practicality today is making your future both easier and more financially secure.