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!

19 comments

  • The “it’s my money and I want it NOW!” commercial annoys me to no end. I think you hit the nail on the head- it’s #4 that moves us to break rules 1-3. Consumer debt is a choice, not an inevitability.

  • I think the main problem in the U.S. today is lifestyle inflation not having a living wage. Does every one need a 32″ LCD TV? Nope, but I have friends that make $8/hour that have one. Does every bride to be need at least 1 carot to say yes? Nope, but I know a lot of grooms that finance a diamond so they can purchase a large one.

    I believe that the problem with lack of savings/over spending is a life style inflation that has swept the nation. We all feel like we need the latest Dyson vacuum for $400 because it’s the best. I think a lot of people feel entitled to these things. People choose things over health care and that’s what’s dangerous.

  • Congratulations on the milestone!

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  • Excellent points.

    “advertisements that inundate us daily make it hard to learn in the first place.”

    Ain’t that the truth, this is why college kids get in such trouble when they get their first credit card.

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  • congrats on the 500 readers!

    did you now that a whopping 45% of consumers always carry a balance on their cards? No? Well I got it from your numbers!!!

    The quarter that don’t have credit cards are the illegal ones that don’t have SS ids and haven’t figured out that you can lie blatantly on credit card apps. Even people’s pets have credit cards!!!

  • Shawn@MoneyBrick

    Hmm… this post seems to me to be half-conventional and half-unconventional thinking.

    Point #1 is definitely unconventional! I think most people would pay off that mortgage right away.

    Point #2 is well-taken and it is common advice, but as you said, easy to say, hard to do. I like how you advise to just totally avoid temptation… no Doritos in this house!

    Point #3 is great! I agree with you. But of course, those getting insurance should make sure that it’s exactly what they need and that they aren’t paying for frivolous extras that aren’t needed. Insurance is just to cover big disasters – not little ones.

    Point #4 is where I’m going to have to disagree with you! I do agree that people should stop thinking short term… but, you said, “I would rather minimize potential loss than maximize potential gain.” I feel that, actually, most people are already like this. For example, people would gladly fork out $1 for a chance at winning $1,000,000… even at a nearly impossible 1 in almost-14 million chance. However, if asked how much they’d sell a lottery ticket with the same chances for the ticket-holder to win their ENTIRE net worth, it’s doubtful whether they’d even sell that ticket for $10,000! I think it was Seth Godin that wrote about this… basically, people are so scared of loss, that they don’t change the way they do things – even if there’s the potential for a real improvement or gain.

  • @joanna: I actually like that commercial because it sums up in a phrase so much of what is wrong with consumerism.

    @SD: It is lifestyle inflation – that’s at the root of it. At some point in the last 25-30 years the concept of ‘the good life’ really exploded into a warped parallel universe. I blame the rise of cable TV, frankly.

    @LOD: True, that number follows – but I guess my point was that a majority of Americans still aren’t falling for it. I don’t have any consumer debt, nor does anyone in my family or my wife’s family. Many of my friends don’t, either. I guess my point is that – like the plague of obesity in America – it’s a CHOICE that’s being made, rather than some irresistible force.

    @Shawn: I guess what I meant was that when it comes to consumer debt, people assume the best – “I’ll pay this off next year!” “This BMW will have great resale value!” etc. So people maximize their short-term gain rather than worry about a loss in the future. I see what you mean, and using your interpretation (and Seth’s) your point is valid – it’s just not exactly what I was getting at.

  • Shawn@MoneyBrick

    Steve, oh yeah… I see what you’re saying now. Yeah… thinking like that is real detrimental. Even thinking, “I’ll deal with it tomorrow…” is just asking for disaster!

  • What’s kind of scary about those numbers is that if many Americans don’t have much debt, the amount that the others have is even more staggering.

    “They are being crippled by a culture of short-term thinking – “it’s my money and I want it NOW!”” I couldn’t agree more. They’re also being crippled by visions we’ve developed as a culture.

    I mentioned bridesmaid dresses on my site yesterday…people have certain ideas of how a wedding should be. And they’re willing to go into debt and pressure their friends to spend money (buying dresses, for instance) just to be in their wedding.

  • “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.”

    Your “low interest rate mortgage” is only low if you keep it for the full term. Regardless, you’ll still pay huge amounts of interest before you own your home. The front end interest load on a mortgage is the biggest challenge that most folks have in being able to amass sufficient wealth for retirement.

    Fortunately, folks are now learning how to use a Home Equity Line of Credit (HELOC) as an interest cancellation account to accelerate their home equity and payoff their home *years* sooner than listed on the mortgage amortization schedule.

    Remember, a home is not an asset until it has been paid off “free and clear” — until that time it is a liability.

    Today’s Real Estate market means that folks can no longer count on appreciation to build home equity. Those who realize that they need to pay down their current mortgage debt are looking for alternate ways to aggressively (yet safely) build equity.

    And they’ve discovered a perfect online system to do that; they can focus on their wealth accumulation goals while accelerating their equity simply by using a Home Equity Line of Credit to ‘power’ the Money Merge Account™ financial solutions program.

    A typical 30 year loan (of whatever type) can be paid down in 1/3 to 1/2 the time — it’s a great way to save *huge* amounts of income by eliminating a mortgage amortization front-end interest load. (On a million-plus dollar home, I’ve personally seen where the Money Merge Account™ program will save the homeowner $750,000 in interest charges!)

    And the best thing – homeowners don’t have to refinance their existing mortgage or, in most cases, make any adjustments to their lifestyle.

    It is unfortunate that most of us were never taught to follow three essential principles: (1) Avoid paying interest, whenever possible, (2) Use other people’s money, whenever possible and (3) Find and use a financial system that will guide you, especially if you have the tendency to go off-track. The Money Merge Account™ software and the program’s counselors use these principles to keep each homeowner focused on their wealth accumulation goals.

    I’d be happy to provide further details…

  • I surely say it’s a victory of your article….
    I congratulate U for your achivement and
    i wish U for achiving big target…..
    =========
    Bob
    Don’t be a victim. Stop credit card debt now. We can help.
    http://www.stop-credit-card-debt.com

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