Why Do Americans Have So Much Debt?
I think of my grandparents’ generation. My grandfather built a successful lumber and coal business and didn’t dream of going into debt for it, let alone for personal purchases. Debt just wasn’t used by the average person back in the 1930s and 1940s. My parents also took a very conservative view when it came to borrowing money, again only relying on a mortgage to finance their home. Credit cards were paid off every month and they paid cash for major purchases such as cars and even college educations for the kids.
During a radio program, a caller once asked me why I thought debt had become such a problem in America. I replied that in my opinion, it was a function of our fallen human nature, the increasingly consumer-driven society we live in, and the opportunity for businesses to make huge profits from the interest they can charge for lending money. Just take a look at the financial results of many of the country’s largest companies and you’ll find that their credit operations are often one of the largest contributors to their overall profit.
A Financial Drug
Scripture contains a number of references about debt that discourage its use, including Proverbs 22:7, which says, “The borrower is the slave of the lender.” Habakkuk 2:6–7 warns, “Woe to him who heaps up what is not his own — for how long? — and loads himself with pledges! Will not your debtors suddenly arise, and those awake who will make you tremble? Then you will be booty for them.”
The Old Testament even speaks of debt at the national level. In Deuteronomy 28, the Lord speaks of a blessed nation being a lending nation, and a cursed nation being a borrowing nation. By and large, our grandparents’ and parents’ generations took this “scriptural sense” to heart and avoided debt. Unfortunately, we seem to have lost our fear of debt and instead it has become a financial drug that creates dependencies for millions of Americans.
There are types of debt for just about any situation you find yourself in, but the basic categories include the following:
• Credit cards
• Installment loans
• Automobile loans
• Student loans
• Home loans
• Home equity loans
• Co-signed loans
I’ll cover issues related to home loans, home equity loans, and student loans later. With the exception of home loans, student loans, and possibly co-signed loans, all of these forms of borrowing fall into the category of consumer credit.
Let me give you a good rule of thumb when it comes to taking on debt: Never go into debt for anything that you don’t expect to appreciate in value! While it’s one thing to borrow prudently to purchase an appreciating asset, such as a home, investment property, or college education, Americans are borrowing billions of dollars to buy stuff that has no long-term value.
Let me be as clear as I can be: If you want to reach true financial freedom, you need to eliminate all of your consumer credit. It’s as simple as that. If you currently have any consumer credit, you need to make a commitment to use the Accelerator Repayment Plan to be explained in later articles. It’s your best opportunity to be free of financial bondage. But before I show you how to eliminate your debts with the Accelerator Repayment Plan, I want to share a few thoughts on each of these forms of debt.
Credit Card or Debit Card?
I have mixed emotions as to whether you should use a credit card, debit card, or neither. In general, my answer is to use what works for you, but you need to be totally honest with yourself. Too many people (about 20 percent of American households) get caught in the trap of only making the minimum payment that the finance company requires. This is ludicrous, because it means you’re going to take at least five years to pay off last week’s family outing to the pizza parlor! If you don’t have the financial discipline to pay off a credit card in full every month, my recommendation is that you don’t use them, and in fact, cut them up and cancel them. They’re just too dangerous for you until your financial habits change.
When it comes to debit cards, people often think they’re safer than credit cards since the funds are withdrawn directly from their bank account. However, many folks use overdraft privileges that are tied to their debit cards. If they need a little extra cash, they go ahead with the purchase even though the money’s not in the bank. The bank gladly allows it, since they’ll make a profit from the interest charges. This is virtually the same thing as not paying your credit card off at the end of the month, and you’ll pay heavily for it. So a debit card may work for you, but don’t — I repeat don’t — accept an overdraft capability on the account if you’re going to use one.
The use of credit or debit cards requires a minor adjustment in tracking of expenses in the budget. Since your monthly credit card bill or bank statement will have a large number of transactions that relate to different expenses, you’ll need to summarize those transactions by the categories used in your budget. I use a numbering system (all grocery items are coded with 1; gasoline expenses get a 2, and so forth). When done coding, I total the amounts by category and transfer the account totals to our individual account register in order to update the budget.
If you don’t have the confidence that you can manage either credit or debit cards responsibly, I recommend that you keep your system limited to cash and checks. An envelope-based system may be just what the doctor ordered.
We’ll continue with this topic next time.
Phil Lenahan is Director of Finance at Catholic Answers and author of Catholic Answers’ Guide to Family Finances. If you have a question you would like Phil to address, contact him at plenahan@catholic.com.
