Avoiding Debt
Christine and Mark Moellering have a debt problem.
Their credit card debt came to $22,228, including $380 in monthly finance charges. Interest varied from 12.1 percent to 32.24 percent. The Moellerings also have a mortgage of $93,000 and a home equity loan balance of $68,574, at 8 percent interest.
John Leland, of the New York Times, points the finger at changes in federal regulations:
Just a generation ago, financial profiles like the Moellerings' would have been unusual. But changes in federal regulations since the 1980s, along with consolidation in the banking industry and changed consumer attitudes toward borrowing and saving, have made credit more widespread, more heavily marketed and more confusing, with offers of more credit "” at low rates "” extending to even the least reliable risk. In 2006, the industry mailed out nearly 8 billion credit card offers, up from 3.5 billion in 2000.
Credit card debt, less than $8 billion in 1968 (in current dollars), now exceeds $880 billion, more than tripling since 1988, adjusting for inflation, according to the Federal Reserve Bank. Penalty fees alone cost consumers $17.1 billion in 2006 "” up from $12.8 billion in 2003, adjusted for inflation, according to R. K. Hammer, a bank card advisory firm. In part because of the debt burden, the consumer savings rate fell below zero percent in 2005 and has stayed there.
Of course, there could be another explanation. According to the article, they built up their debt over several years: $6,000 in student expenses put on the credit card, $50,000 for a wedding that included rings, a reception, a honeymoon, a new bathroom. Just this past Christmas they bought an $800 42-inch television.
I think the Times wants me to feel sorry for this couple. I don't and I don't think I should. They've made a constant series of bad decisions. Ms. Moellering was "too busy" to apply for student loans, so she put her education on the credit card. They both wanted a nice wedding, so they spent $50,000 on one. Mr. Moellering was too busy to calculate his checking account balance, so he racked up $288 in bank fees. Both were too impatient, so they bought a TV on credit knowing that they already had more debt than they could manage. Their debt problem isn't the fault of federal regulators. Their debt problem is the result of buying things they want -- whether or not they can afford them.
There is a simple trick to understanding the vagaries of credit card contracts and interest rate schedules: make sure that you never put spending on a credit card unless you know that you can pay it off when the bill comes. If you follow that simple principle, you won't end up paying 32% interest. Let's take a look at how this principle could have helped the Moellering's.
Problem: You want to get married. Analysis: You have $161,000 in housing loans and another $6,000 in credit card debt. Decision: Have a small, simple ceremony with family and friends. Ask friends to help cater the reception and enjoy your honeymoon somewhere close to home.
Problem: you just got married and your current bathroom is in poor condition. Analysis: We already have $161,000 in housing loans and another $6,000 in credit card debt. Decision: endure the crummy bathroom. Decide to be thankful that you have an indoor bathroom and not an outhouse like your great-great grandparents.
Problem: you want a new television. Analysis: We already have $161,000 in housing loans and another $6,000 in credit card debt. Decision: Visit the local public library, check Craigslist, and find a used television that you can pay cash for.
Sorry Christine and Mark. I hate to be the person to break it to you. Living life as an adult requires that you take responsibility for your own decisions. Living life as an adult requires you to live within your means, not within your wants. Your debt is your responsibility. Please don't try to blame it on anyone else.