Exploring the Culture of Debt
Note to anyone who may be near a college campus anytime soon, chances are that you’ll see at least one representative from a credit card company at some point. He or she will be armed will be easy to spot: armed to the gills with CD wallets, pens, T-shirts, whatever might be remotely interesting to a college student. If you happen to see a dark-haired woman, about 5�1, tackle the representative to the ground, trussing them up with all the skill of Batman himself, please don’t stop her to introduce yourselves. I’ll most likely have a schedule to keep.
OK, I don’t go around tackling all credit card holders, credit-card company reps, or even credit card company executives. The scenario above is, sadly, just a fantasy. It’s a product of my misdirected rage at the state of personal debt in this country. For the record, I have my own credit card debt, amassed during my first year out of college. It’s on a steady decline, a within the next year, it should become a memory. I wish I could say the same for my friends and family, and the rest of the population.
As a nation, we’ve racked up about $500 billion in credit card debt, up from $150 billion just 10 years ago. That’s debt that isn’t written off on taxes like student loan interest or mortgage-related debt. That’s just pure, unadulterated debt that sits, giving the cardholder an expensive lesson in the magic of interest. What’s most disturbing to me is the amount of debt the average college student amasses before he or she even starts working. According to Nellie Mae, 1999 undergrads had an average of $1,843 in debt from plastic before they even got their first paycheck. Graduate students, classic overachievers, had an average of $5,179. According to CardWeb, the debt situation for older working Americans is even bleaker: $7564 on average per household with at least one card. Just so there’s no confusion, that figure is without any other consumer debt such as auto loans or mortgages.
OK, enough with the stats, let’s talk about how we got here. From my experience, I see two major factors contributing to this national debt problem and a third aggravating factor for those in major debt trouble.
Factor #1: Lack of Education
No, this portion of the article hasn’t creeped over from the Public Policy section. I’m not going to turn this into a treatise on how schools have failed our children (although teaching basic personal finance in schools is an idea that’s long overdue). Thanks to the hype over the raging bull market, many schools and children’s web sites now have stock picking exercises that encourage children to follow the market and learn about big business. This practice in itself is okay in my book since as adults, the stock market will probably factor in their long-term savings plans. However, we seem to have missed a few steps here. Have we taught these kids to balance a checkbook? How about the meaning of “bad credit?� Anything about budgeting in there? How about that little “extra� that gets tacked on when you buy something with a credit card? This isn’t rocket science, folks. These are basic life skills on par with walking, talking, and eating with utensils. Children tend to be fairly observant but without reinforcement, explanation, and correction, event the most fiscally responsible parent can raise a child who believes:
- Money comes from the ATM, if you need more, you just stick a plastic card in to get it.
- Using another kind of plastic card to buy things at the store means you don’t have to give them money.
- If there are checks in your checkbook, you have money in the bank. (This is my personal favorite).
- Money for big, expensive things, like cars and houses, is at the bank, you can just go there and get it.
By the way, the above examples come from actual conversations I’ve had with young customers at the various financial institutions I’ve worked at in the past three years. Know what you get when you have several million people growing up with these fractured beliefs in a country obsessed with spending? You get a large group of people with $500 billion in revolving debt – pay attention!
Factor #2: Your Wallet By Picasso
Another factor that I see contributing to the debt situation to a lesser degree is also one that one that will become increasingly important in this technology-driven environment. It’s what I call the “abstracting of money.� A large part of my job as a marketer for a financial institution in Philadelphia is to encourage our customers to rely on “remote access services� for their banking needs. Therefore, I push telephone banking, on-line banking, ATM and debit card usage, and electronic loan processing. We offer price breaks for customers with direct deposit. From a business standpoint, it makes sense, we spend less on “bricks and mortar,� we can have better rates and stay competitive. The customers save more on loans and earn more on deposits. Everybody wins.
Well, not really. The number of customers with bounced checks jumped. The number of delinquent loans jumped. More people became overdrawn on their accounts than ever before. Turns out that when even the careful customers stopped actually seeing their money, they stopped paying attention to it and worse, they started spending more. Studies by the credit card industry have shown that consumers armed with ATM, debit cards, or credit cards will actually spend about 30% more than if they were paying with cash. Despite the backlash against ATM fees, these machines are here to stay and people use them with increasing frequency. They take out large amounts to avoid fees, only to end up spending more. To further complicate matters, many consumers use automatic deductions from their checking accounts to stay on top of their bills. With all this money flying around electronically, they forget to record transactions in our checkbooks (if they ever learned to do it at all). They lose track and things gets real messy, real fast. They not only lose track of the money they have, they lose track of what they owe.
Factor #3: Bad Debt: Big Deal, So What, Shut Up
For all my naysaying, there are probably a few of you out there who think I’m overreacting and that debt is just a fact of life. You’re right, to a point. Certain kinds of debt are practically unavoidable. Very few of us will ever be able to pay cash for a house, a car, or an education. Mortgages, auto loans, and student loans are facts of life. Credit cards do have their place, as well, particularly in e-commerce and for emergencies. Problems arise when, as a result of a poor understanding or a loss of financial restraint, we fail to take responsibility for our chunk of that $500 billion.
Faced with a mountain of debt and little hope of repaying it quickly, it’s become far too tempting and too easy to walk away. Bankruptcy, once a scary word for any working family, is often referred to today as a “clean slate� or a “fresh start.� As if not taking responsibility for your own spending should leave you with a lemony fragrance. I’m going to stay off the Public Policy soapbox for now (I make no promises for future issues) but while bankruptcy reform plods along in Washington, both bankruptcy and bad credit have lost their effectiveness as punishments for a lack of financial responsibility. Once again, drawing on my job experience, I’ve met countless individuals who, after refusing to pay credit card bills and loans for years, will still get credit cards, auto loans, and even mortgages, albeit at higher rates. The fact that bankruptcy filings in this country grew almost as quickly as debt in the last ten years indicates that this system isn’t helping. Chalk it up to an overly competitive finance industry but bad debtors know, there is always another lender, always another way.
Like most of my colleagues at TINN, I tend to be fairly liberal minded. I believe people do learn from their mistakes and deserve a second chance to prove themselves. But I also believe taking the time to learn to do it right the first time should have its rewards as well.
The bottom line: if someone hands you a great deal of money, unless his name his Regis, chances are, he or she will want it back at some point. Be an adult, pay it back and get on with your life. You’ve got better things to do.
