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

[Bryan X]

That is a nice problem to have! I'm glad your wife is doing well, too.

 

[JoeyR]

Great to hear both your loved ones are doing ok

 

[JoeyR]

Same here we had a guy that our company actually paid the Cobra for him to come work for us, 3 person family but his wife was pregnant and that was the cost. There would have been no way he could have come work with us if that wasnt done.

 

[Carl Miller]

Who is giving advice? This is a discussion, not a counseling session. Lighten up Eric.

But, I'll take your average COBRA premium of $400 per month, and raise you $200. This COBRA can be a lifesaver for a total of $600 per month....And then I'll ask you if this is what you'd pay if you, God forbid, had to take on Cobra to retain your insurance if you were fired? Because it would cost me a whole lot more than that.

Of course, the next question is, so what? $400....$600 per month. This is a lot of money for a family to suddenly have to pay. How much does the average American family gross today? $60K/year? How is this average American family paying this bill? Especially if one of the spouses is out of a job and potentially seriously ill on top of that? With a mortgage? A car or two and insurance for them? And all their other bills.

As for some sources, I had already mentioned the Harvard Study from 2005 Medical bills trigger half of all bankruptcies - Personal finance - MSNBC.com

As for health insurance companies canceling policies of people with cancer:
Health Net ordered to pay $9 million after canceling cancer patient's policy - Los Angeles Times

And a related article Insurers blasted for dropping the sick

 

[DaveF]

What are the assumptions behind this? Ten years income seems very high -- at least for me. Not so much for an older family with children. I have one year of insurance on me (and nothing were my wife to die). I would expect that with insurance, savings and selling a car she would have at least one year, and likely two or three years, of income without needing to work. But in her mid-thirties, she certainly could find employment and take care of herself.

Is that cold-hearted? I balance that versus the monthly payments for (unnecessary) insurance which we can put into savings, or spend on necessities and luxuries.

And when I met with an insurance agent with a large, reputable company, the estimates were something like $100 per month for what you are suggesting.

So what is the calculus for insurance?

 

[Brian Perry]

If we take a step back for a moment, let's consider savings. Most reputable advisors recommend saving 10% or more of your salary towards retirement (and, as mentioned earlier, an emergency fund). If one is able to do this, then an unexpected $400 per month for COBRA shouldn't be a backbreaker, as you can just temporarily use the money you were putting towards savings, until things get back to normal.

If someone is unable to put any money aside for savings, and is living check to check, then that is the real problem. Ask yourself this -- if you lost your job, are you one or two paychecks from being broke? If so, the absolute first thing you need to do is limit all discretionary spending until you have the emergency fund built up.

 

[Brian Perry]

That's certainly something that will vary depending on the circumstances. If you are single in your 20s, there is no point at all to buying term life insurance. After all, if you die, no one will be affected by your loss in income (except for funeral costs). On the other hand, if you are married with kids and your wife stays at home, you would want to have as much as you can reasonable afford to provide for the unthinkable. One interesting thing is that you can't really buy too much because when you get to a certain point, the insurance companies won't sell you more than you can prove you need (i.e., you can't buy a $10 million policy if you make $30k per year...it would raise too many red flags).

 

[DaveF]

Insurance companies may not let you buy "too much", but they'll certainly let spend you too much. Or make poor decisions when deciding between term and whole life. If an insurance agent is intent on ripping you off, having policy caps isn't going to stop him.

 

[Patrick_S]

Let’s get back the to the Credit Card companies.

I’m all for personal responsibility but I look at CC companies as one of the poster children for corporate hypocrisy.

There was a time when that industry was more tightly regulated. They fought for deregulation and got it. Many things changed, including the rates they could charge. They really are now what used to be called usury rates.

They also became far more aggressive in their expansion practices and started to give credit to high risk customers. If you look at it, they ran their business rather poorly by practicing these high risk expansion practices but I guess the interest rate they could charge were more attractive then the risk.

So when the number of individual bankruptcy filings started to rise, (not solely contributable to CC debt but it certainly did contributed) what do the CC companies do? Did they stand up and take responsibility for their poor choices?

Hell no!

Let’s get the laws changed to make it harder for individuals to file for bankruptcy was their response.

Of course all of the supporters for the change harped on about personal responsibility but no one would mention that perhaps the CC companies should have been more responsible with their decision making processes.

I love how corporations are always talking up the bed rocks of capitalistic theory like “free market forces” but when things take a turn for the worse they are first in line for corporate welfare granted by the government.

 

[Bryan X]

Along with personal responsibility, I think the credit card companies do need to be free to turn down applicants who aren't worthy of credit. But I fear if credit card companies actually did this, there would be cries of discrimination.

 

[DaveF]

A coworker observes that's it's completely incongruous that companies issuing unsecured loans have so much claim on borrowers assets.

 

[BrianW]

I wanted to respond to this earlier, Gene, but I didn't have time. I think this is an excellent question in the context of unemployment, but it is exceedingly difficult to answer.


When I was unemployed and had run out of savings, I measured my accumulating CC debt not in absolute dollars, but in the number of months it would take me to pay it off once I was able to find employment again. Of course, this was based on a number of assumptions, like what my salary would be, etc., but I made the best estimate I could at the time. For every month I lived off of credit, I estimated it would take about 2.5 months to pay off once I found a job.


The difficult part about this is that you have to make the “Enough Is Enough” decision while you're still unemployed without knowing how long it will be before you find another job. As it turns out, I was unemployed for seven months, and the CC debt I incurred is quite manageable. Things worked out, and the price I paid to keep my house was worth it to me. But I consider myself very lucky.


I could have been very conservative and planned for the worst. If, expecting the worst, I had sold my house right after losing my job and moved into a trailer, I wouldn't have had to incur any CC debt to survive. But I would have deeply regretted losing my house in this fashion when it turns out that I could have hung on to it with manageable debt. On the other hand, if I had gone two years instead of just seven months without a job, selling my house and moving into a trailer right after losing my job would have been the best thing I could have done.


Another challenging aspect of this is that it's easy to add just that one more bit of debt to the pile you already have. “Another mortgage payment is due? That's just another month-and-a-half of CC payments to make once I find a job. That's not too bad. Groceries? That's not even half a month. That's a no-brainer.” Not only that, but as the debt accumulates, each mortgage payment and grocery bill you add to it becomes a smaller and smaller percentage of the debt you've already accumulated, making it seem increasingly like you're not adding much to it. Once it's become a certifiable mountain, what's another dump truck load going to hurt?


But the most challenging part of incurring debt in order to live between jobs is that once you've decided you've accumulated too much debt, you've already accumulated a lot more than way too much. It's a high-stakes gamble. If I hadn't found a job for another year and a half (yes, many of my colleagues were unemployed for more than two years during this time, so it's not unreasonable to think it could have happened to me, though I had no idea at the time my friends would be unemployed that long), then not only would I have incurred all this debt with no way to pay it off, but I still would have lost my house and ended up living in a homeless shelter.


So you pretty much cast your lot once you've made the decision to incur debt to survive. Who would put a single mortgage payment on a credit card, and a month later decide it's time to sell or default on the house? What's the point of that? You just incur debt with nothing to show for it. No, if you'll do it for one mortgage payment, you'll do it for two. And if you'll do it for two payments, you'll do it for three. And so on. And the more you do it, the more you feel like you have to do it, hoping you get that one interview, that one offer letter that puts an end to the cycle before you bury yourself in a mountain of debt, because the only thing worse than having a mountain of debt is having a mountain of debt and having to live in a homeless shelter.


How much is enough? If you decide to go down that road, then trust me: you won't know until it's far too late. And this is a road that reasonable people of average means go down quite often. Like I said, I was lucky. Many of my colleagues, not so much.

 

[Carl Miller]

Brian, if you can manage the unexpected $400 per month expense for a year let's say, that's great. I can, but it's only within the past 3-4 years or so that I've gotten to the point where I'm able to say that...If this happened to me 6 years ago, it would have been a huge hit to our finances and we would have had to withdraw from our 403's to sustain ourselves, thus stealing from our retirement to save our present. If it happened to us 15 years ago, we'd have been back living in with Mom and Dad. And if it happened today, it would be way more than $400 per month for us if we had to go Cobra but that's beside the point.

I think the problem with this discussion is that there is a lack of understanding of who comprises America. The "average" American family doesn't have a lot of money socked away, nor do they have a lot of money to sock away.

Our Financial Failings - washingtonpost.com

If Eric would like to correct these figures that's cool by me..they may be a few years out of date by now. But half of America isn't invested in the market at all. Not stocks, no funds, no bonds no nothing....55% have no employee sponsored pension plans to speak of. I have no idea how many without employee sponsored plans have opened their own IRA's and such, but I'd bet it's not that high of a percentage.

Only 20% of housholds in America have family income over $100,000, the median is $48,000, 20% earn less than $21,000.

The bottom line is that we tend to view everyone else in the context of our own lives and to many of us here, having to deal with an unexpected $400 per month Cobra payment for a year is manageable....But in reality, for your average American, it is not.

 

[Carl Miller]

Exactly. As I said in an earlier post, when I was headed off to college, the only way I could get a CC was if my father put me under his account. My name on the card, his responsiblity to pay if I didn't.

25 years later, and I have an 18 year old son going off to college who can get a CC with his own account, no parental co-signing, with a spending limit of $20,000.

This is an industry that needs regulation or, at the very least, to be held responsible for their own bad decision making.

 

[Patrick_S]

I honestly don't see where you are coming up with the idea that they aren't free to turn down applicants.

Could you provide us with how you are coming to the conclusion?

 

[Bryan X]

I'm not saying anyone is legally forcing them to, just a suspicion that if they started turning down applicants (or severly cutting credit limits) we'd soon see people claiming the credit card companies aren't being fair to them. And as others have said, the credit card companies make money off late fees and penalties, so they aren't inclined to do so. I'm just saying if for some reason they did, that's what I think would happen. Just my thoughts, that's all.

 

[Brian Perry]

The thing that changed fairly recently is that the CC companies and the mortgage lenders stopped analyzing each loan on its merits. They realized that it was quicker to basically approve anyone with a pulse and even approved so called "liar's loans" where you told them what your income was (even if it was a total fabrication). Based on the market conditions at the time-- continually rising home prices, relatively low unemployment, and changes to the bankruptcy laws Patrick mentioned-- there were low defaults. The lenders realized it was more profitable to approve everyone and live with the 2% or so defaulters than to waste time processing each loan the old fashioned way to achieve at best a 0.5% default rate.

Well, things changed over the last couple of years, where the housing market pretty much tanked and people had already pulled all the equity out of their houses. Loans are now being scrutinized much more closely. And the CC companies and mortgage lenders found out their new business model doesn't work with a default rate of 5%+ and declining home prices. So I think we may actually see a return to more sane lending practices.

 

[John Dirk]

Perhaps for the short term you will be proven correct, but the root issue of runaway, blinding greed has not been addressed so I think there's still more to be learned. Any type of taxpayer bailouts will only extend the time needed to learn from these "mistakes."

John

 

[Adam Lenhardt]

I know people who can't get credit cards because their credit score has gotten so bad. That said, the problem is that you have to dig yourself damn near to bankruptcy to reach that point.
The first credit card I got entering college had a $500 spending limit. This was purposeful on my part; I knew I couldn't get into too much damage on $500 a month. I got probably a thousand offers in my mail that summer, many with much better offers; if targeting college freshmen isn't a predatory practice I don't know what is. Credit cards are not a good mix when you're managing your own finances for the first time.
Thus far, I've never finished a month with a balance. That said, I'm currently unemployed. My parents let me move back home while I try to get back on my feet and my land lord let me transfer my lease through September to new tenants early. If either of those two things hadn't happened, I'd be accumulating debt fast.

 

[Radioman970]

About 2 or 3 years ago I was offered a 0% interest for a year card and they allowed me to transfer my $6800 balance from a 12% interest card to it for free. Neat eh? I spent that year tightening my belt and putting all the money I could on it and paid that off. I haven't been in debt since. I pay off everything monthly. I'm really having a good time since fixing my credit has given me an excellent credit rating. Anyway, that's my situation.

Something interesting happened last year. I used BUY IT NOW to get a computer. I was given 6 months to pay it off. I paid it off. I tried the same option to get a telescope that cost exactly the same and was mystified as to why I was turned down. I'd have a year to pay off the same amount I paid off in 6 months!! But they didn't want me the second time.