credit card debt is not pandemic

You might think that America is being crippled by consumer debt. It is not.

“The majority of U.S. households have no credit card debt. About a quarter have no credit cards, and an additional 30 percent of households pay off their balances every month. (Source: Federal Reserve)”

I certainly do not want to minimize the nastiness of the credit card companies or belittle the discipline it takes to get out of debt once you’re in it. Interest is a double-edged sword. If you are earning interest, it’s amazing, but if you’re paying it then it seems like an insurmountable challenge sometimes, I’m sure.

Amidst all the calls for personal finance education (which I have made) and the sermons telling people to regulate their spending and manage their money better (guilty), an awful lot of Americans spend less than they earn and manage their money adequately.

Why do I say only “adequately,” then? Statistics show many Americans have no debt but also have little – if any – savings. In 2005-2006, the US savings rate dipped into negative territory for the first time since the Great Depression. More people are using home equity as a way to finance credit card debt – in other words, if you “consolidate” your credit card debt with a home equity loan, you technically have no credit card debt. That is not the same thing as having no non-mortgage debt, and in fact is far more dangerous. I also suspect, although I have no statistics to support this, that many Americans would have credit card debt if they were forced to obtain health insurance, but they’ve chosen short-term financial health by taking chances with their long-term financial health. Instead of going into debt, they choose to go uninsured. It’s a mistake (and one of the two most pressing problems the presidential candidates will natter on about but probably fail to fix once he (or she) is elected).

Despite all of these alarming statistics, Americans are not being crippled by consumer debt. They are being crippled by a culture of short-term thinking – “it’s my money and I want it NOW!” It is not that difficult to avoid this thinking if you haven’t already been trapped – but the advertisements that inundate us daily make it hard to learn in the first place.

1. Enter into no debt. None. Ever. Don’t even get a mortgage unless you can pay for it. Spend only what you have. Is that insane advice? I have enough money to pay off my mortgage tomorrow. I choose not to, because I’d rather invest my money in the market and leave my very low interest rate mortgage alone. My hope is that if I could average a 10% return on investments and I have a 5% mortgage that I’ll come out ahead, rather than if I dumped all of my investment money into my mortgage. That is our only debt, and we do debate finishing it off sometimes – but we always come back to the fact that we have a very low fixed interest rate and it just doesn’t make sense. But auto loans? Credit card debt? No way.

2. Pay yourself first, so you have even less to spend. I am a disciplined spender and saver and even _I_ need to pay myself first. I forget how much of my paycheck disappears before I even see it into my 401K, and that’s a good thing. Even the smartest, most disciplined saver – which I would not claim to be – is better off without temptation. It’s the same reason I don’t keep Doritos in the house for guests. I know I would eat them if they were around, so it’s easier to keep my house free of crispy-and-tasty-but-artificial-and-fattening snacks.

3. Insure yourself adequately (health, life, property, car, etc.) so that you never have to break rules 1 or 2. If you don’t have insurance, your best intentions may be for nothing. Even a quick visit to the hospital in our part of the country can set you back thousands. That’s plural.

4. Stop thinking short-term. Now, I do exactly the opposite. I see the whole twisted tangled web of possible future consequences every time I think of doing anything, and thinking about it make me very risk-averse. I would rather minimize potential loss than maximize potential gain. This trait does serve me well financially, though. Too many people don’t understand that for EVERY action there is a consequence. You cannot have action without consequences. Try to consider what the results of your actions are.

The first point is critical. Obviously once you have consumer debt you’ve got a deep hole to dig out of, and many times people incur this debt before they have the “ah-hah” moment that tells them they made a mistake. I understand completely how this works – I did the same thing with my health, ballooning up to 300+ pounds before getting healthy again. The biggest trick with so many of the temptations in life – overspending, overeating, nicotine addiction, drug addiction, you name it – is not to get started in the first place. Easy to say, I know, but harder to do.

(photo by banoootah_qtr)

Odds and ends: At least for today there are 500 subscribers to brip blap! While there’s no real significance to 500 – as compared to 499 or 501, for example – it’s a nice milestone to hit, psychologically. 100,000 visitors is a milestone looming on the horizon as well. Thanks to everyone – you are a great group of readers who make doing this worthwhile!