“We must again master the primeval art of waiting on things until we can pay for them. Credit can be a good thing, but its misuse destroys character. It creates a mirage of prosperity, becoming a self-made sword of Damocles. Cars, houses, furniture and clothing dangle dangerously above the heads of the indebted. If they have no real wealth, sooner or later the whole bundle will fall.” Mark Rutland, Character Matters: Nine Essential Traits You Need to Succeed

I Am Seriously Alarmed
by Joe Tye (joe @ nfnq.com)

© 2004-2005, Paradox 21 Inc.
(Used with Permission)

I am seriously alarmed…

… by the implications of what Robert Manning, in the subtitle to his book Credit Card Nation, calls “America’s Addiction to Credit.” Here are some sobering facts:

The typical American household has nearly $9,000 in credit card debt spread across an average of ten different cards. This typical family pays over $1,000 per year in interest and finance charges on that debt. As one financial expert put it, “people are spending money they don’t have to buy things they don’t need to impress people they don’t know.”

Adjusted for inflation, the average family’s total debt increased by 46% between 1990 and 2003. Much of this new debt is in the form of home equity loans taken out to pay off high interest credit card debt. Unfortunately, many of these people are running up their credit card debt back to the previous levels, and are now at increased risk of losing their homes (for example, should a job fall through).

Our national savings rate has dropped to near zero (lowest in the developed world). So not only are we spending everything we make, we are borrowing to spend even more – to the tune of $1.7 trillion (yes, that is a “t,” not an “m” or a “b” in front of the “rillion”). The great tragedy is that compound interest – which we should have working FOR us – is now working AGAINST us.

Financial planning experts tell us that 9 of every 10 baby boomers are not saving adequately to fund anywhere near the type of retirement to which they aspire. And as a nation of spenders and borrowers, we are creating an enormous collective debt that is likely to become a hideous problem for our children’s generation – who will be called upon to pay that debt.

One of the main culprits is that our definition of “essential” is expanding faster than our income is growing, and we are financing the gap with “plastic surgery.” Things that didn’t even exist within recent memory – microwave ovens, CD and DVD players, cable television, cell phones, internet connections, bottled water, low-fat lattes, family nights in Las Vegas – these thousand little things are being purchased “on credit,” adding a continuous infusion of new plastic straws (credit card charges) to the backs of our already overburdened financial camels.

People can use credit cards responsibly for years, paying off their balances every month and even getting rebates or frequent flyer miles, but when a misfortune such as losing a job or serious medical problem comes up, end up using credit cards as their “safety net.” As a consequence, they accrue debt that grows at 20% or more every year. I’ve worked with people who are paying all they can pay every month, and are still seeing their total debt increase each month because finance charges are being added at an even faster rate.

For every “success story” of a start-up business that was bootstrapped on credit card debt, there are dozens of horror stories of businesses that are saddled with crippling high interest debt that precludes investment in product development and marketing. The business owners are typically on the hook personally for these credit card debts, and many have lost everything as a result.

We have become a nation of suckers for what appears to be a free lunch, but is in fact is a very expensive room service dessert. As just one example: for years General Motors has been offering “zero percent” auto financing, yet nearly 100% of that company’s profits come from finance charges on new car sales. One study showed that fully 88% of people who buy things “90 days same as cash” end up converting to debt payments at 25%-35% interest rates.

We are raising a generation which lacks any genuine understanding of the link between working for something and getting it. Several years ago, Sony promoted its Citibank card with an ad asking the question, “Who says hard work never killed anyone?” The answer was: “Some dead guy.” The ad went on to position the Sony card as “the official currency of playtime.”

Credit card ads play on our basest desires and guilt feelings. As just one example, the ads encouraging fathers to charge an expensive wedding for their daughters on a high interest credit card by calling it “priceless” neglect to point out that it could also leave you penniless (and in many cases, has).

Today’s number one target market of credit card companies is children, and these dreadful campaigns are working. The average college student has nearly $2,000 in credit card debt – on top of his or her school loans. I’ve seen too many horror stories of students who begin post-college life with a level of debt from which they have no realistic hope of escaping in anything like real time.

Credit card debt (and threatening tactics of collection agencies that go after credit card holders when they fall behind on payments) is the #1 factor cited in personal bankruptcies, which last year (2003) exceeded 1.5 U.S. million households. Americans today declare bankruptcy at ten times the rate during the worst year of the Great Depression.

The credit card industry (where executives refer to people who pay their bills on-time without running up finance charges as “deadbeats”) has pushed legislation to make it even more difficult for people to escape credit card debt through bankruptcy. The fastest-growing segment of the population to declare bankruptcy, however, is not real deadbeats; it’s single women struggling just to get by. The median annual income of people filing for bankruptcy protection in 1998 was just $22,000.

Credit card debt is a major factor in many divorces (and in making many of those divorces so bitterly contentious).

Although we have an unprecedented standard of living (for example, the average home of today is more than one-third larger than those of the previous generation), surveys show that the gap between what we have and what we think we want is actually increasing. So the problem of credit card over-extension is probably going to get worse before it gets better (assuming the financial roof doesn’t cave in first).

The most terrible influence of credit card debt is its baleful impact on our values and moral character. This effect is so insidious that we’re often not even conscious of it. We are participants in the most grossly materialistic and self-centered culture since the late Roman Empire, but we rarely stop to think about the overarching moral questions when we slap our plastic down to buy the latest of life’s “priceless” necessities with money that as a result is not available to invest for retirement – or to contribute to helping others who are lacking the genuine basic necessities.

I have recently started asking my speaking audiences for a show of hands by people who have a problem with credit card debt. Especially considering the fact that some are too embarrassed to publicly admit it, I’m appalled by the number of hands that go up (well over half in every case). The first step to overcoming an out-of-control addiction (which includes credit card debt) is to acknowledge the problem in the first place.

I fear that at some point in the not-too-distant future there will be a reckoning. You and I might not be able to prevent that reckoning from occurring at a global level, but we can each take effective action to protect ourselves and our families from its worst impact. There’s a classic old song that says, “tomorrow never comes.” Well, tomorrow will come. I hope you will be ready for it.

“Millions of Americans today are in serious financial jeopardy because they have confused, and continue to confuse, borrowing capacity with spending capacity.”

My immediate advice to you is to…

1. Cut up your credit cards. All of them. Right now. Instead, use a bank debit card, which will not allow you to borrow from tomorrow to pay for yesterday. I have not had a credit card for over three years (and never will again). I travel extensively for my business, and have virtually no problems checking into hotels, reserving airline tickets, or renting cars (through Budget Fast Break) using my bank debit card – so long as there is money in the underlying account.

2. Stand in front of a mirror and forcefully repeat the following: “Read my lips: No New Debt! If you need to buy a car, save enough to pay cash for an old clunker if you can’t afford to buy a good used one outright. Remember, zero percent is not zero percent, and there is no free lunch.

3. Be a status contrarian and stop spending money on things you really don’t need. Thomas J. Stanley, author of The Millionaire Mind, has studied thousands of self-made millionaires, and found that they buy used cars, knowing that spending good money on a new car that will depreciate 20-30% when you drive it off the showroom floor is financial idiocy.

4. Teach your children the virtues of frugality and saving. Above all, pound into their little heads that they are the number one target of what Dave Ramsey calls “immoral” marketing programs of credit card companies; that the only reason they might need a credit rating is so they can borrow even more money; and that “stupid” is far too kind a word to describe someone who borrows money at 18.9% to pay for clothes and computer games.

5. Invest $80 and 15 or so hours in your financial future by ordering True Wealth – Your Values and Your Money. Details follow.

"You can save your way to solvency, and you must earn your way to prosperity, but you usually end up borrowing your way into trouble."

Joe Tye
"America’s Values Coach"