American’s have one of the highest standards of living in the world. We have nice cars, big screen televisions, comfortable houses, a closet full of clothes, three square meals a day, and on and on. We don’t actually have these things in equal proportions; in fact, there are millions in this country who go without many of the things most of us take for granted, like a warm meal or an extra pair of socks. But the greater numbers of Americans enjoy a quality of life that is exponentially greater than the vast majority of the rest of the world. Most of this success is due to the ingenuity of the citizens themselves, their hard work and dedication. Some of it is due to our capitalistic economy that allows and fosters innovation through competition and financial reward. But another factor, the silent partner if you will, is the establishment of the credit industry.
Although the use of credit is nearly ubiquitous in today’s world, there was a time not too long ago when there were no such things as credit cards or debit cards. For a few big-ticket items, like a home or a car, a person could get a loan through their bank. For most other things though, if you wanted to buy something you had to have the money to pay for it then and there. Occasionally, “accounts” could be set up between merchants and consumers, but rather than being an organized program for all consumers, such arrangements were made on a case by case basis between friends or frequent associates. In those days, the average American’s standard of living was much more closely aligned with the rest of the world, though still faring a little better because of the industrial base and individual commitment.
Then, along came the credit card. This wonderful piece of plastic, embossed with a person’s name and account number, would revolutionize the way we lived and bought things, raising our material wealth, and as a result our standard of living, by introducing the concept of buying on time. With the credit card, a person could purchase that new washing machine now and pay for it over a whole year, making it less important to save for things, but more important to have a steady influx of cash. Still, by spreading out the total cost of an item, the monthly payment might allow the purchase of several big things, with a combined monthly cost less than that of buying a single item outright.
Flash forward 50+ years to today and the result of the credit industry is a national standard of living that looks good in person, but on paper it’s an accident waiting to happen. The average American has 7.6 credit cards in their wallet. (Store cards, gas cards, bankcards, etc.) The average household credit card debt is around $8,000. 43% of Americans spend more money than they earn each year, and as a whole, for every dollar we make we spend $1.22. We may be driving new cars and wearing designer perfumes, but the truth is that much of what we “have’” isn’t really ours yet because we’re still paying for it on a monthly basis.
So what went wrong? On the face of it, credit seems like a fantastic economic concept. By increasing spending power, you can increase production. Increased production creates increased business profits, which beget an increase in tax revenue. Seems to be win-win all the way around. And as long as everyone makes their payments on time, everything works out fine. But just because it looks simple and sounds simple doesn’t mean it is simple. Although credit makes things more affordable by spreading out the cost over time, buying on credit costs more than buying something with cash. It costs more because the person (or company) extending the credit charges you a fee for the privilege of paying over time. Behind the glowing promise of materialistic satisfaction lies the business end of the credit industry: interest payments. This is where people get themselves into trouble, and it is what the credit industry thrives on.
Using credit so that it benefits your life is a learned skill, but unfortunately it isn’t one that is taught to us as young adults. Instead, most of us learn about credit the hard way- through trial and error. It starts about the time we graduate from high school and we receive our first credit card opportunities through a bank or department store. Usually, the first cards are the easiest to get and they offer a low credit limit and a high interest rate. For the first time user, the concept that spending $200 you don’t have and ending up paying $300 for it doesn’t compute with a $10 monthly minimum payment. And without prior education, the thrill of having what you want when you want it is more than many 18 to 20 year olds can handle. Soon, they find themselves with several credit cards and increasingly higher minimum payments. Then they realize that their minimum payments aren’t reducing their balances and discover that they are barely paying the accrued interest each month. A missed payment bumps up the interest rates and triggers late fees and/or over limit fees. The balance increases and the trouble compounds from there. At the same time, a negative credit report is being built, making it harder and more expensive to get credit in the future for something more important than a new jacket or the latest home video game system. But by the time this is realized, the damage is done.
How much of this personal financial meltdown is the fault of the credit company and how much is the fault of the person? Certainly, credit card companies don’t force anyone to spend more than they can afford. But they certainly encourage it and actively seek as many possible customers as they can get, whether that person can afford the credit being offered or not. And while some credit companies seek only those customers for whom credit is a convenience, many others actively seek out those with marginal incomes who are often more in need of ready cash flow and less likely to take the time to understand the punitive details or the credit agreement. The result is a person indefinitely tied to their credit card balances, behind in payments, and unable to make ends meet or get ahead, and an increase in personal bankruptcies. Credit, instead of being the financial fairy godmother for families, becomes like a mafia loan shark waiting to take a bite.
Credit problems aren’t unique to individuals though. Companies small and large depend on credit for their day-to-day operations. Government carries the largest debt balance of anyone, which almost begs the question of who’s copying whom. It’s as if living beyond one’s means is the norm, and is not only expected to occur, but it’s considered downright odd not to be in debt to many different lenders at the same time.
Credit requires responsibility, trust, and rational expectations, both from those requesting credit and those granting it. Since the credit industry is a business, it has a right to generate a modest profit for itself. It is after all providing a service and helping to stimulate economic growth. But a society steeped in debt is not a free society. It is a society in hock, an indentured civilization where the rich get richer at the expense of middle class desires.
What needs to change? First of all, we need to educate our children (and ourselves) about the use of credit, the penalties associated with credit, and the consequences of poor credit reports. Start personal finance education in the middle and high schools and make a basic understanding a requirement for graduation. After all, in the real world, more people need to know how to balance a checkbook that figure the volume of a cone. Secondly, restrict the blind credit solicitations from credit card companies. The predatory solicitation of credit card companies is like an avalanche in every mailbox. Not only are these unsolicited, non-stop credit offers needlessly wasting valuable trees through paper consumption, they are aimed at those least able to pay the monthly balance in full. Credit should be sought by an individual, not forced down their throat. Third, decrease or eliminate over-limit fees in favor of temporary account freezes. After all, the purpose of credit is not to go eternally in debt, but to facilitate needed purchases or to use in place of cash you already have in the bank. Fourth, eliminate the automatic rate increase so popular among today’s lenders. Why should a late payment trigger an increase in all a person’s accounts, even ones with a perfect payment history? The only reason for this is to profit from a persons temporary misfortune. Fifth, limit the maximum interest rates to 10% or less. This is still enough for credit companies to make great profits, but low enough to keep debt from spiraling too fast. Sixth, require consumer notification before adding negative credit information to a person’s credit report. This allows an individual to account for any missed payments or other potentially negative problems. Seventh, require credit counseling for individuals who have chronic credit problems. Eighth, require credit companies to extend no more credit than a person can reasonably manage, and require subsequent credit companies to extend no more than a certain combined total of disposable income. Ninth, increase privacy laws by prohibiting the sale of credit bureau information and restricting access to that information to only companies currently doing business with that person. Strict enforcement could also reduce a large number of identity thefts, something that is an ever-growing problem.
Adopting these changes could help release the stranglehold that credit companies have on so many families these days. And by ensuring that people could afford the credit extended them, the number of write-offs would probably decrease, saving the industry millions of dollars each year. Slightly tighter credit requirements would encourage more saving and less impulse spending, good for both individuals and government in the long run. (More saving- less dependence on government aid.) But in addition to reining in the practices of credit companies, we also need to teach and expect people to better manage their finances, and by extension, the government must better manage its finances as well. Because a nation of debtors is only as secure as those who hold the note allow them to be, and when you’re in debt over your head, it doesn’t take much to start drowning.
This entry was posted on Friday, August 19th, 2005 at 7:16 am and is filed under Common Sense, Economy, education, Government, Politics, Reform.
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August 19th, 2005 at 9:29 pm
We’re on the road to serfdom, Ken.
Wages never rise. Tort reform takes away corporate liability. Bankruptcy reform keeps us under their thumbs forever. The removal of the Estate tax insures that the economic classes are even more separated.
They reached the upper class, and they pulled up the ladder behind them.
And then they take our civil liberties. We’re on our way to serfdom, Ken.
August 19th, 2005 at 10:57 pm
The best side of debt to be on is the collections side – although, who wants to be a repo man anyway? Think of the biggest fish to catch in this game. Visa, Mastercard, and AmEx. These people only collect pennies on the dollar for every transaction, but that is world wide. Add it up and the number is staggering. Visa, located in Foster City CA doesn’t even have a sign on their building because they need to remain secretive. The industry is ellusive and slippery and is raft with well healed lobyists withe their hands masterbating every president we have ever had in the last 50 years.
The best debt to be in is no debt. As Shakespeare once said, “neither borrower nor lender be…” And the rest of the quote is worthy of repeating but I can’t remember it off the top of my head.
Another quote comes to mind – in America, there’s a sucker born every minute.
Many traps lure the dollars swiftly out of the Average American’s wallet. Credit Card Debt is only one.
August 20th, 2005 at 1:50 am
Do you buy credits for blogexplosion or just have a lot of free time on your hands?
Pappy
Mackin with Pappy
August 20th, 2005 at 2:19 am
Hey Ken – I just added you to my blogroll. Meant to do it before now. Great blog you have here.
The best debt is no debt. It’s very liberating. It really doesn’t take much money to live on, if you don’t owe anyone anything.
August 20th, 2005 at 4:27 am
I found this an interesting and thoughtful post.
thanks
Josse.
August 20th, 2005 at 8:34 am
Excellent.
Your educational scenario is right on the mark. And we see the need for understanding and respecting your credit played out right now, in the world currency markets. As El Shrubbo’s borrowing has gone off the deep end, holders of our currency have more and more doubt in our ability to keep it propped up as our interest payments soar-and the currency, as a result, is tanking around the world.
We will all suffer the end-result of the borrow and spend El Shrubbo policy, and I assure you it will be sooner rather than later. The price of oil, of course, already reflects world uncertainty about the dollar. The Chinese decision to uncouple the renmibi from the dollar is a screaming red flag that soon enough will be reacted to by many other countries.
August 21st, 2005 at 1:58 am
I just added you too ken, and I think you have a great blog.
August 21st, 2005 at 6:37 am
(responses)
Bulldog- I sure hope not. I think I’d look awful in a burlap bag, and I know that they are quite itchy…
Wages rise selectively, but so do prices. Strike one. Businesses bury their errors behind secrecy settlements and keep on screwing up. Strike two. Bankruptcy has become a bankrupt process itself. Strike three. You’re right… not looking too good for Joe Average.
America is all about opportunity and when enough people see how it’s being sucked away through corporate greed and political malfeasance, I think we’ll shake off the apathy and avoid tilling the master’s plots. So where are the writhing angry mobs? Anyone…
Windspike- At 18-29 per cent interest, that adds up to quite a few pennies. I know I’ve paid my fair share over the years. Maybe if we started electing politicians from the middle class instead of from the upper economic rungs, we’d have some laws that didn’t pander to the interest industry.
Yes credit card debt is only one of the many, but it often the most insidious because of it’s ease at obtaining and falling into the trap.
Pappy- It is a combination of both, with the former accounting for the larger part of my credits. Why do you ask?
Martian- Thanks- I dropped you in mine a week or so ago too. I like what I read on your blog.
You’re ‘right of course, but when we live in the “gotta have it” society, it’s hard for people to remember that the bill is always going to come due. Pay up or get out,a s they say. And yes, life doesn’t have to be expensive. Which is better? Living under a pile of debt always worried about making the payment on time or living wihtout some of the trappings of todays world but being able to rest at night? Not a hard choice, but people need to be taught how to make it happen before it’s too late.
Thanks for the comment.
Josse- Thanks. hope to hear from you again.
Jolly- You make some of the same good points that were brought up in the Haloscan Comment section, and here was my response:
“Of course the situation with China holding a significant portion of our national debt is troubling, too many eggs in one basket, as it were. China’s recent revaluation of their currency may be an indicator of dark things to come, and if so, there is no shortage of pain on the horizon, especially if they move dramatically in any direction. This too is an extension of the debtor mentality. Not only are our government’s fiscal actions unsupportable from a “balanced budget” standpoint, but their wholesale waste of tax dollars on give-aways, subsidies, and outright wastefulness only ensures an underfunded state of being.”
Thanks as always for the comments.
Athene- Thanks for the link up. I’ll make sure to drop by and visit your blog too.
August 22nd, 2005 at 12:28 pm
Well… I agree that credit cards can be useful and devistating at the same time. We have an account we only use for emergencies and so far, we haven;t had to use it. That is the only credit card we have because I would definately be in trouble if I had one. I already have to pay back for college, I don’t need another big bill.
Ken I love your mind and your way of expressing yourself. keep up the great work!
August 22nd, 2005 at 1:26 pm
I agree about the credit cards and that it can be a trap if you don’t know how to put a limit to it.
But…I’ve lived in a lot of different countries around the globe that can easily be measured with the US when it comes to living and what people want.
And yes, I’ve lived in the US as well.
Good living isn’t always necessarily about having the possibility to have all the latest tech, three meals a day or a pair of extra socks. These things are defined differently depending on where you were born.
Forget about the $$$. They come and go, and what is left is what counts. That’s what high standard of living is about
August 22nd, 2005 at 4:19 pm
This is one of the great overlooked challenges to our culture. I know very few people who didn;t get into major debt trouble or who are not currently teetering in a precarious position.
All of your proposals are great ones, but alas none will be implemented because too much money will be lost by thw already wealthy credit card companies. In fact the recent bankruptcy law chages end up affecting the exact people you are talking about – people who get into big credit card debt and then have an economic mishap.
Another big component of this is the fact that people no longer save money – forgetting that banks pay nothing for savings anymore – people have nothing to save even if they did.
Additionally people continue to invest in bad products like cars and other depreciable goods and not in anything that actually produces a return.
It is beyond irresponsible to give a 19 year old kid access to hundreds of dollars in “free” money. I should know I was one. it’s bad enough that we have to start our careers already deeply in debt from an educational system that should be free, but that we have to add credit card debt at exhorbitant rates on top of it.
Everyone should have to take a financial management class in high school and then a refresher in college – but then the credit card companies don’t want an educated market.
Good stuff as always, Ken!
August 22nd, 2005 at 5:47 pm
I agree that we NEED to start teaching our kids financial responsibility. One way to do so is to give them an allowance and MAKE them save a portion of it. For instance, with our boys, we make them save 25% for long-term stuff like college and 25% for short-term items like a new bicycle or skateboard. They also tithe (for non-Christians, this could be “charity”). They are are still relatively young but as soon as they are old enough, I will start teaching them about proper credit usage.
JLP
AllThingsFinancial
August 22nd, 2005 at 6:12 pm
Well said.
August 23rd, 2005 at 2:47 am
Interesting piece, Ken. I’m glad you drove home the point that credit requires responsibility on both sides – those requesting credit and those granting it. My Dad taught me the value of a good solid dollar bill in my hand – we tend to forget the value when we’re whipping out the credit card and postponing the careful thought about what we’re actually going to wind up paying for later.
August 23rd, 2005 at 4:51 am
(responses)
angel- glad to hear from you again. Credit is a double edged sword all right…nice to have, but easy to abuse. Especially when people aren’t taught even the basics of personal finance.
Christa- You seem to have a good grasp on what is and isn’t the most important thing in life- money we need to get along and go along, but it’s not all that matters. A paradigm shift needs to occur whereby people can actually think in those terms. Until then, at least we could help people learn how to keep from going in the financial hole.
Glad you dropped by.
Rudicus- Most people, including me, have fallen into the debt trap, and there are only two ways out: hard work and discipline to eradicating the debt or bankruptcy. Fortunately, I’m out of the trap, but if I had learned some financing principals as a kid, it would have been an easier road for sure.
Your perceptions about the battle to really reform the credit is right on, but when people take back the power, elect honest politicians who will do what is right, things can change. I’ll just keep talking about it and hope that Common Sense catches on.
And predatory practices need to be eliminated as well. The only reason the credit companies have such influence is their big pockets, a lot of it extracted from people who have no knowledge of the credit game.
Glad you dropped in.
JLP- Yep- education is the key. Parents need to develop their own realistic budgets and talk to their kids about it when they are old enough. And schools should play their part too with actual classes teaching about savings, checking, credit, interest, and the works.
Thanks for the comment.
CK- Thanks.
Jude- Individuals are responsible for their credit messes to a certain degree, but the irresponsible granting of credit are just as liable for the trouble most people are in. And unless you bay the credit bill in full each month, you’r epaying far more that the sticker price for anything you buy.
Thanks for leaving some thoughts.
August 23rd, 2005 at 1:22 pm
Well said Ken, Great Blog!
August 23rd, 2005 at 5:27 pm
‘fraid I didn’t read all the post, or all the comments, as I’m trying also to get some office work done between blogging.. 😉
But I just wanted to add my ‘2 cents’, pun intended.
I grew up in a very different system, with a vastly different set of beliefs about money than the ‘average’ American. Not that my way was right, jsut different. It has it’s own complications. I’ve never had a credit card, I’ve always had debit. I’ve always been afraid of getting into debt. As a kid, there was always a massive stigma attached to it in the general pysche of the English. Debt was shameful, and best avoided, even if you went without.
Money is life force energy, the same as any other form of life energy, we do the same things with it that we do with food and sex, if you really study it.
The common egoic pattern of money use is degenerative, as opposed to regenerative. Regenerative is to set up a pattern where your money brings you more money, or your sexual energy is conducted through the whole body, not just blown off through localised gential orgasm, but chanelled and converted into ecstasy, into a total lust for life as a whole.
Spending money can have the affect of orgasm, temporarily satisfying, distracting from our present condition of fragility in the world, but ultimately depleting of resources. Same with that extra sandwich or piece of chocolate..
August 23rd, 2005 at 6:49 pm
(responses)
Duwbyrd- Thanks for the comment. Hope to hear from you again.
Chandira- Interesting comments here, and definitely some food for thought. Money, food, and sex do seem to be prime motivators for humans,as you say, but overindulgence in any of these can have negative consequences. Too much food and we get fat and unhealthy. Too much debt and we get miserable and desperate. Too much sex and we get…..okay, maybe sex doesn’t fit this model well.
I want for people to stop looking at money as an end in itself and more as a means to an end, that end being a happy life and not a stressful or corrupt one.
As always, thanks for leaving your two cents.
August 25th, 2005 at 3:45 pm
Can’t say I have it all handled though.. lol.. I’m on the same thoughtwave as you about the overindulgence.. 😉
October 4th, 2005 at 12:20 pm
Hey, you have a great blog here! I’m definitely going to bookmark you!
I have a do it yourself credit repair site. It pretty much covers do it yourself credit repair related stuff.
Come and check it out if you get time
December 10th, 2005 at 12:00 am
Hi again Ken… Finally got around to adding your blog. Keep up the straight talk…. WE all need it.
Toodles