Do people really carry this much debt on their credit cards? (1 Viewer)

[Chris Lockwood]

That's because the concept is flawed.

Why can't people understand the concept of adults taking responsibility for their own actions, rather than painting everyone as a victim?

 

[andrew markworthy]

To take another example. I don't know how things are in the USA, but in the UK almost as common as a loan with a heavy interest rate but low monthly payments is the 'buy now, pay 1 year later' loan or the interest free loan. A friend of mine at one stage was chief legal advisor to one of the biggest of the companies offering these schemes and I asked how on earth they made money on them. He explained that around 60% of people pay on time and the company just about breaks even on them, or even loses a little money. But the remaining 40% are the cash cows (his term) that they're after. They take out these loans hoping that they will be able to rustle together the money at the end of the period or they kid themselves they can keep up the monthly payments, and when they can't do this, a new fun interest rate kicks in - 34% per annum.

The trouble is that we now live in a society where conspicuous spending is king and this has been fuelled by outrageously easy credit. Gone are the days when you saved hard to afford luxuries or big purchases such as a house. Things may have been a bit different in the USA, but in the UK you really had to make an effort to get a loan. E.g. I can recall my parents (a design engineer and a schoolteacher, so not exactly impoverished hicks in unreliable low paying jobs) having to wait two years between applying for a mortgage to being granted an interview with the bank manager to see if they were suitable for a loan (if I recall correctly, the sum requested was just about my current monthly wage). And this was very much the norm in the 1950s/early 60s. Now Brit banks advertise that they can give you a decision on your suitability for a mortgage or loan in two minutes.

The result is that it's now the norm to get credit and following from that, inevitably the unlucky or plain dumb will run up debts. As someone said a few posts back, the typical debt is not as large as the figures suggest, because of skewed distributions, etc. But nonetheless, there is still a serious debt problem. And whilst I agree that there should be a level of individual responsibility in consumers, the banks are not innocents in this matter. Take the case of property prices in the UK. These have skyrocketed over the last decade (though they are now falling). People couldn't work out why, until someone factored in self-certification mortgages.

If you don't have these in the USA, a quick word of explanation. If you're self-employed and have irregular payments, a normal mortgage calculated on a regular monthly income will be no good. So instead, you put in a declaration of your annual income and average out your monthly income from that, and then the mortgage is calculated on this basis. Now with property prices rising, a lot of self-employed people couldn't afford a desired property on their income (though there might have been affordable properties in their income bracket, they didn't meet their aspirations). But what if the bank or estate agent suggests to you that you over-estimate your income? The declaration made to the bank is based on an unverified statement, so who (other than your conscience and common sense) is to know? Buyers could take on these mortgages on the expectation that if house prices continued to rise, in a couple of years they could sell off the property and make a profit. Then they could go for another larger property, again conveniently forgetting their true income. The banks were happy with this arrangement because self-certification mortgages carried a higher interest rate to cover the risk.

But the problem with the scheme is this. When everyone was more or less honest in declaring their incomes, housing prices tended to rise steadily but not outrageously. Thus, the whole situation was kept under control. But as soon as people were in effect allowed to buy well beyond their means, this self-regulatory system collapsed and we got rampant property inflation. And all this because a few dishonest bank employees could earn a bit extra commission using a system that should never have been so badly regulated.

 

[John Dirk]

Chris;

Not trying to put words in your mouth, but it may be the media's [and some politicians] spin on predatory lending that has you concerned. I hate that too because their ostensible compassion is completely self-serving and generally false. Others, for the same reasons, take the complete opposite point of view, showing no empathy whatsoever. As is usually the case with extreme interpretations, the truth lies somewhere in the middle.

People should be held responsible for their decisions and their debts and I would favor education over legislation and runaway bankruptcies, however, lenders are guilty to the extent they make inadvisable loans and offers of credit to minors. I also find it deplorable that they prey on our men and women in the Military with pay day loans etc. Some things, while justifiably legal, are still flat out wrong.

John

 

[TravisR]

Absolutely correct. People should be responsible enough to not max out of a credit card but at the same time, the credit card shouldn't give a $20,000 limit to someone with no hope of being able to pay that much money back. In the case of a college student, I'm sure they do it in the hopes that the kid maxes the card out and then their parents bail them out so their kid's credit isn't ruined until they're 30.

 

[John Dirk]

Yes. The industry even has a term for what you describe. I believe they call it "social culpability."

John

 

[Holadem]

I listen to that same This American Life broadcast as well. Fascinating stuff.

--
H

 

[DaveF]

andrew - Finances in the US are much the same. No-interest financing is commonly offered for more expensive items, like furniture. And your description fits what here was called a NINA loan:No Income No Assets. Purely self-stated income, with no verification by the lender. This was the final phase of the mortgage craze, and is what has given us millions of homeowners who can't afford their house payments.

H - I've only rarely listened to This American Life as its schedule never fit mine. But I found it's podcasted now, so I've started listening regularly -- part of my spring-time lawnmowing mix That episode, Big Pool of Money, is now a favorite bit of reporting. I also urge you to listen to "The Audacity of Government" from a few weeks ago, if you haven't.

chris -- Even if the prey is complicit, it doesn't make the companies any less predatory. Some are proactively targeting people's base desires, their ignorance, and weaknesses. The "predatory lenders" make the most money when their customers make poor, even damaging, financial choices. It may be good capitalism, but I think it's poor social responsibility.


It's a surprising thing that some people don't realize that "minimum montly payments" won't pay off their credit debt. If they use that, they only dig themselves a deep economic hole. With this basic gap in mathematical education, imagine the bad choices they might make.

 

[gene c]

And there are a couple of things I haven't seen mentioned yet. Or maybe I missed them. First is late fees. $29-39 a pop. Very profitable for the card companies. The second is the bump up of interest rates. You may start out with a good rate, but even if you pay the card company on time, every time, if they find out you were in default with a car payment or your gas bill, they can raise that rate up to 22-26%.

Seems to me they make more money on less responsible individuals than on those who pay off on a regular basis. Maybe that's why the target certain class groups and flood the market with cards.

 

[Carl Miller]

Exactly. They don't want you to pay your balance in full. It's the last thing they want to see from a card holder.

When we carried our credit card debt, we got at least 5-7 CC offers in the mail every week. New cards. Pre-paid, and balance transfer offers galore....When we paid off our card in full with two large back to back monthly payments and had a zero balance for the first time in like 6 years, the CC offers increased for a few months to 10-12 per week. It was ridiculous. Clearly hoping they'd get their hooks in us again.

Now, we rarely get CC offers. Our son gets them all. Even his college where he starts in August offered him a credit card...Great opening line in that offer too:

"With our 6 month interest free credit card, you won't miss a class ( or a party ) worrying about your book bill this semester......".

 

[bobbyg2]

Me and my friend were talking about houses and buying vs renting, with turned to a discussion about debt, which lead to him saying "I only owe a few thousand.". I had to hold back laughter, seeing as his monthly income is less than $900, $700 of which goes to his rent.

I have stupid friends...

 

[BrianW]

In addition to unexpected medical and car expenses, there is also job loss. Seven months of unemployment meant making a few mortgage payments with credit cards. It's not debt that I would have incurred voluntarily by, say, financing a Mercedes, gambling at casinos, or buying a condemned zoo, but I don't regret going into debt to keep my home. Now that I'm employed again, that debt is being reduced quickly, and will be paid off by the middle of next year. Throughout it all, I never missed any payments, and, ironically, my credit record never had any blemishes, despite my vexing uncreditworthiness.

People can be stupid and greedy, and lending companies can ge predatory and greedy, but sometimes life really does dump on you.

 

[Brian Perry]

I agree. It wasn't that long ago that people were complaining about being shut out from the American Dream (owning a home). So then the lenders go to the other extreme and basically give a loan to anyone who wants one, and then they get lambasted for that.

 

[Philip Hamm]

Please refrain from commenting further on a concept you apprently have no comprehension of.

 

[John Dirk]

In the real world, medical and car expenses are not entirely "unexpected," although I do acknowledge they can be overwhelming in some situations. My point is simply, since we know that, as you put it, "sometimes life really does dump on you," a prudent individual will put money aside during the good times in anticipation of this.

I would also submit to you that the vast majority of people drowning in debt did not have situations like yours. They are just irresponsible because they know the system will ultimately provide a safety net for them. I see people everyday driving Escalades and talking on Blackberrys, yet they use EBT cards at the supermarket. It's gotten completely out of hand and the irony is, those of us who are financially responsible end up having to pay for it. I grew up on welfare, so I know there are plenty of legitimate cases out there, but we need true accountability and responsibility.

John

 

[DaveF]

I'm conflicted on this. On the one hand: many people (middle class folk) were making a lot more than normal with lucrative jobs in real estate, as mortgage brokers, doing home construction and remodeling, and selling cars to those people with extra cash. Now things are lean. So where's all the savings from the past five years above-average earnings? (oh, right, they spent it all on cars and houses, and vacations)

And yet, there's expenses, and then there's expenses. I plan for normal medical issues: new eyeglasses, a few doctor's visits, etc. And I've got insurance, etc. But I don't plan for cancer. I can't anticipate the random, short-term disabling or life-threatening disease that costs me tens of thousands of dollars and puts me out of a job.

And my understanding is that it's these events that tend to bankrupt people, more than frivolous spending. How much planning and preparing do you do? I don't know. Talk to an financial planner and they'll scare you silly and have you buy insurance for your insurance.

 

[Eric_L]

Sure you can; About Disability Insurance

Lets not forget about social security disability and workman's comp also.

 

[JoeyR]

You forget Brian, they have alot of know it alls and well to dos on this forum that dont understand that side of it. Take me for instance shining example, my wife sent her car in for 700 dollars in repairs, this morning I found out that the repairs would at least be 1700 dollars with no guarantee that the car would be fixed( 2000 Malibu, 79,000 miles, that we have all routine maintenance done on since we owned the vehicle) and more than likely after the 1700 we could incur upto 5,000 dollars in repair but there was no way to know until we spent the first 1700. Well in excellent condition Kelly value of the car is 3000. So I called in some favors and ended up buying a '07 Chevy Blazer at a crazy price(cheap) but now I still have a note for 5 years that I wasnt planning on having this morning. There went my recent bonus, stimulus check, and income tax refund, when I already had the money lined up for something else but thats the way it is and thats the way it goes.

But this thread is one of the reasons I dont frequent this forum as much anymore, too many rose colored glass aholes that dont realize that some people no matter how hard they work or they make just have shit happen again and again, trust me if everything would go perfect I would love it but that isnt how it is but Brian I understand where your coming from and thats all I have to say about this subject.

 

[Brian Perry]

You're right that some people seem to have "shit happen to them," but it's hard to be sympathetic when you compound the initial problem by going from a car that probably got decent gas mileage to one that is a pig. And unfortunately the new Chevy will be more likely to have serious repairs in coming years than a comparable Honda or Toyota.

There is good luck and bad luck, but the choices we make have a lot to do with which is more likely.

 

[Carl Miller]

Medical bills are the leading cause of personal bankruptcy in America, accounting for nearly half of all cases per a Harvard study in 2005.

All this planning chatter is all well and good in theory, but unrealistic for many people through no fault of their own. All the planning in the world won't prepare someone for the costs of a cancer battle which even for insured people can result in tens even hundreds of thousands of dollars in uncovered costs.

I'm not suggesting people shouldn't plan, because they should. They should also live within their means at all times, and spend responsibly. But there are limits to how much you can plan for the future, and even limits as to how much you should sacrafice in your present, just in case something catastrophic happens in the future.

 

[Brian Perry]

In my opinion the main reason people are stuck with catastrophic costs is that they are unwilling to look at primary or supplemental policies that cover costs above a catastrophic limit, but they instead choose policies that cover less costly--but more likely and frequent-- minor illnesses.

There is a guy who works for my company who actually opted out of our health insurance and got his own. He is 50+ years old and takes blood pressure medication. His policy costs $200 per month and has a $5,000 deductible (with 100% coverage once that is met). If he gets cancer or some other costly disease, he is assured of not paying more than $5,000 per year. The "downside" is that he has to pay for any minor illnesses throughout the year until he reaches his $5k deductible. But I think that's what insurance is intended for -- not for every aspirin and doctor's visit to be covered, but rather the big costs that would be potentially ruinous.