When There Is Credit, There Is Debt
Friday, July 13, 2012, 2:00 AM | Leave Comment
The statement – when there is credit, there is debt – cannot be 100% correct. There are folks – very few I might add – who get credit but still they don’t carry debt. And the reason is they pay their debt on time before the due date, excluding mortgage monthly payment.
That I believe is, conceptually, good debt. It directly affects your livelihood as long as you pay the monthly installment regularly and on time.
Having said that , do you know the immensity of debt Americans are under these days – to the tune of over $15 trillion? How the heck can anybody count that? I cannot even comprehend it.
That’s way beyond my, according to the British detective novels author Agatha Christie, little gray cells. However, if you put that money in a sack and put it on my shoulder, I would go straight 6 feet down below – RIP, no more worries then.
In his book Collateral Damaged: The Marketing of Consumer Debt to America, author Charles Geisst outlines the rise of what he calls the “Great American Credit Machine.” The industry’s marketing executives have been adept at framing the conversation, he says, by calling people’s mounting bills “credit” rather than “debt.”
The credit-card companies, in turn, have made it seem like a privilege to hold their cards, a symbol of one’s purchasing power.
So then Americans have created, over the years and decades, a credit machine. Anybody needs money can go to that machines, spin it a few times, and get the credit. At least, that’s what has been the norm of our financial lives thus far.
Charles Geisst raises some interesting points:
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Debt as commodity
The availability of credit and in turn debt became a commodity. It’s like we go to a grocery store, pick up a few items off the shelf, pay it with credit and sadly to say some people just even forget about paying back that credit.
Our debt-to-income ratios kept going higher and with rising state and local taxes thrown on top of it, people’s fixed costs got higher.
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Debt as Mortgage
From 2000 and onward, in order to reduce the interest on their credit cards, people were using their home-equity lines to pay off their credit-cards bills. Then, they would congratulate themselves by going out to dinner.
They never realized that they were eating part of their house at the same time. And why would they do that?
Geisst says people use credit cards as a source of working capital whereas it should be their income. They fund everyday living on their cards.
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Debt as purchasing power
Credit became a purchasing power not one’s income. At the end of the day, that credit actually became debt as purchasing power for most Americans.
Media advertisements paint it as a privilege to be a member. “This shows your purchasing power.” The credit-card companies are also very good at designing statements that can’t be understood.
So, basically, it has been slick marketing and deceptive billing practices. The new credit card laws should get rid of deceptive practices.
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Debt as low interest loan
Is it possible these days? Geisst believes we need to reinstate a national usury law for consumer interest. What would that do? Well! Ideally, it would cap interest so that it doesn’t exceed 12 or 13 percent.
It will take a few years before people are completely stretched. Unemployment is the straw that will break the camel’s back. The default rates already are twice what they used to be.
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Debt as credit card
Geiss believes there are 300 millions of folks – that’s considered to be the total population – who are in debt because of their credit cards in the country, and the average household has about 13 credit cards or four per person.
The magic is in the numbers. Just before the Depression started in 1929, we had a population of 130 million people, and we had outstanding consumer credit of $6 billion dollars. It’s clear that there’s something going on here. People can’t stop spending.
In a Nutshell
Geisst makes some interesting and strong points. Read the book. But like I have kept saying, reading and getting information is good, but a better thing to do is to change our mindset and our lifestyle about credit and debt.
