Thursday, April 9, 2009

Why You Can’t Get Out of Credit Card Debt

No, it’s not what that radio ad says, that “the banks won’t let you.” And no, it’s not the unfairness of a system that allows your creditors to charge you any amount of interest they please, and to change the terms of your agreement with them completely at whim. And no, it’s not because there’s a secret that “the banks don’t want you to know,” as a television ad states.

You can’t get out of credit card debt because you refuse to change the way you spend money.

It’s like the jokes about fad diets. “Eat less, exercise more” really does the job. It does cause people to lose weight. But that’s just not sexy and silly and weird enough. People are suspicious of such simple advice. There must be something wrong with a diet if it doesn’t involve a pill, or a drink, or a regimen of strange food.

So, too, people like to fool themselves that getting out of debt is complicated, that “the system is rigged” against them, and that therefore, their honest efforts to end their debt are being thwarted by some Evil Empire of greedy bankers. Sure, it’s true that banks are jacking up their rates these days, even as the cost of money to them has gotten lower as the Federal Reserve has dropped the prime rate. But banks have also extended so much easy credit to obviously uncreditworthy customers that in the end the score may be even as more and more people default. I don’t care about the banks’ profits. Let’s talk about why you aren’t getting out of debt.

When you go on a diet, you promise yourself that you won’t eat a whole list of forbidden foods. These foods may be actively bad for you, or they might just be too much food. For instance, many people would argue that a piece of toast as part of a healthy breakfast isn’t bad for you per se. Yet dropping off that one piece of toast and its accompanying butter, jam, or whatever saves hundreds of calories and is an easy way to diet effectively. Take this analogy into the financial realm, and the issue is that many of the items you buy with a credit card are not necessarily bad for you, but they are too much to be charging if you want to lose debt. For example, if you buy gasoline, it’s not bad; you need gasoline to perform your life’s ordinary tasks such as getting to work or to school or to stores. But if you owe money on your credit card, using a credit card to buy the gasoline amounts to voluntarily paying as much as 30% more for the gas. That’s crazy. Most people know not to do that with gasoline. They pay cash, or use a gas card that they pay off in full every month, or a debit card.

But they don’t seem to know not to keep buying other items that they could do without, and they use credit to buy. It’s easy to get into debt with a credit card, because it allows you to buy things you actually can’t afford. Once you’re in debt, it’s easy to get out of debt: You go on a money diet, a term that is so apt and analogous to dieting that Richard T. Case wrote a book with that title propounding a dieting system to reduce debt. I haven’t read that book so I can’t comment on the details of his plan. By my definition, a money diet consists of two parts, just as a diet does: Part one is to stop eating junk food (stop buying junk). Part two is to eat far less than you need to survive (make drastic economies) so your body must make up for the difference by using up fat (so you have extra money each month because you bought less, allowing you to pay down the debt faster).

And that’s it: Buy less, pay down more.

You say I must be joking. It can’t be this easy. There must be something complex, some secret the banks don’t want us to know. No, there isn’t. If you live above your means, stop. It’s that simple.

But many of us don’t stop, do we? Like the body’s famous (and possibly spurious) set point, we have a set point for our lifestyle. Most of us keep using debt to shore it up when we should change our lifestyle to match our money situation. I’ve talked about this before. Committing to a more lavish lifestyle than we can support with cash means permanent credit card debt.

High finance charges make it more difficult to pay the debt down, just as a low-burning metabolism from too many nights on the couch makes it difficult to lose weight. But these ills can be overcome if you truly intend to get out of debt or lose weight. By the time you get into serious credit card debt or serious overweight, you feel trapped. But you are only trapped by your behavior today and tomorrow. You can get out of debt regardless of the banks’ often unfair tactics. Just as you can lose weight even after you have injuries, body systems failing, and so on. All it takes is the will to buy less, and pay down more.

But you don’t stop using the credit cards. In your mind, every purchase on them is a necessity. Breakfast would not be complete without a piece of toast. Yes, it would. But that’s why you can’t get out of credit card debt.

1 comment:

Anonymous said...

You really should read Predictable Irrational. It covers the heart of your post