Jan292016

Do Americans possess healthy shame concerning consumer debt?

A majority of Americans hold a healthy disdain for consumer debt, but most carry debt anyway.

American_DumbassWhen you see an American Express Card commercial, do you see a sophisticated financial manager or an irresponsible spendthrift? The credit card companies want you to see a savvy money manager who wisely uses their products. But is it wise to use a costly product you don’t really need?

In a world without consumer credit, people would save money, and they would only spend what they had available. People would store their unspent earnings in banks who could loan that money to businesses that produce goods and services that benefit the economy. These savers would also earn money on their savings as lenders competed with each other for capital to make business loans.

Unfortunately, many people don’t have the financial management skills to save money, nor do they have the discipline to do so. In a world of instant gratification, consumer credit is a shortcut that permits people to have what they want now without needed to save to pay for it. However, this comes at a cost. Rather than earn interest on savings, people pay interest on their debt.

In effect, consumer debt is like a negative savings account. If a balance is above zero, people have savings, and they earn interest. If a balance is below zero, people have debt, and they pay interest. People with debt are forced to make monthly payments, which they become accustomed to. The only way people obtain savings is to be self-disciplined and make payments to savings even when not compelled to do so by a bill from a lender. Unfortunately, not everyone has this discipline.louie_lender_lamprey

Apparently, many people haven’t been fully indoctrinated by lender propaganda and they feel the shame associated with their lack of self-discipline. As a result, polls show people are embarrassed about their debts, but since self-discipline is difficult, most people aren’t embarrassed enough to change their ways.

These Americans are the most embarrassed about their credit-card debt

By Maria LaMagna, Published: Jan 26, 2016

When it comes to embracing credit-card debt, the Midwest isn’t so friendly.

Midwesterners are the Americans most embarrassed to admit they had credit-card debt and the least likely to actually have it, according to a survey the personal-finance website NerdWallet released this month. Some 38% of Midwesterners said they would be embarrassed to tell others about their credit-card debt versus 34% in the Northeast and West and 33% in the South.

Midwesterners were also most furtive about carrying any type of debt, with 61% saying they would not want to tell others about it compared to 56% in the South, 52% in the West and 47% in the Northeast. …

I’m one of those rubes who grew up in Midwest farm country. It wasn’t until I was in my 20s that I carried any consumer debt. There is a strong streak of self-reliance and a distrust of debt in rural America, and although I haven’t lived there in a long time, I still retain that part of my heritage. It’s one of the reasons I wasn’t able to suspend my disbelief and participate in the housing mania.

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In 2015, the average American household carried $15,355 in credit-card debt, according to a separate NerdWallet study based on U.S. Federal Reserve and Census Bureau data, and another survey of 2,000 adults.

The average is $15,355? That’s an astonishing number. So what is the average in OC? $50,000? If you add in HELOCs, which is disguised consumer debt, it’s probably much higher.

The Midwest stands out for having high average credit scores, particularly in Minnesota. (Unlike the South, where credit scores, especially in Mississippi, Louisiana and Georgia are some of the nation’s lowest). The region also has the most residents in good financial shape….

The areas with the least debt are bound to be in the best financial shape. There is nothing positive about consumer debt.

There are several reasons why people may feel ashamed of carrying too much debt, said April Benson, a New York-based psychologist and the author of “To Buy or Not to Buy: Why We Overshop and How to Stop.”

“There’s so much baggage that goes with credit-card debt,” she said. “They could come from a family where there was a lot of credit-card debt and they suffered in some way as a result. They could be somebody who’s been chastised for overspending all of their lives, so there’s a big emotional build-up of shame around it.”

Or it could be that people are smart enough to recognize it’s a trap and refuse to take the bait.

Think about the ignorance behind this woman’s observation. She is implying that people are foolishly emotional and overreacting, which further implies credit card debt is good and people should use it.

Others may associate credit-card debt with being materialistic or shallow, said Tim Kasser, the chair of the department of psychology at Knox College in Illinois, and the author of “The High Price of Materialism.”

“There’s this underlying attribution that the person with the credit-card debt has some sort of impulsivity, is unable to plan ahead or unable to follow through on responsibilities,” he said.

Those traits are attributed to people who carry consumer debt because that’s how most of them obtained it. Consumer debt is never the result of careful planning, impulse control, or demonstrating responsibility.lamprey_wallet

But credit-card debt is often easier and faster to pay off than other types of debt, said Sean McQuay, a credit-card expert at NerdWallet, and doesn’t have to necessarily be a source of shame; it can be solved with a short-term plan.

Shame is a good motivator. If people felt no shame, they would succumb to all manner of vice. Those that feel shame may do something about it.

The “judgmental line of thinking” about credit cards doesn’t take into account the fact that since certain credit cards offer 0% APR periods, he added, and may in some cases be a better form of debt than others for that reason.

Yes, the “judgmental line of thinking” about credit cards recognizes the bait-and-switch of teaser rates as an appeal to the “sophisticated” financial manager. Lenders entice people into moving balances around in hopes that they incur fees or leave the debt in place past the teaser-rate period. It’s easier and more profitable to manage savings than to manage debt.Dog-Poohing-on-Credit-Cards

Midwesterners felt ashamed about their debt, and they were less likely to carry it, McQuay added, yet in the South, consumers also felt ashamed, but still found themselves in debt anyway.

“Shame and guilt doesn’t help pay it off,” he said. “The only way to pay off debt is to make a payment plan and do it.”

And the only way to stay out of debt is not to use it.

Consumer debt and housing

When people apply for a home mortgage, the lender will evaluate both their ability to make the mortgage payment (front-end DTI) and their ability to make all debt service payments (back-end DTI). Prior to the housing bubble, no limits were imposed on back-end DTIs, so people used both mortgage debt and consumer debt to run personal Ponzi schemes. Dodd-Frank changed all that by imposing a limit on a borrowers back-end DTI at 43% in the ability-to-repay rules.

Potential borrowers with excessive student loans, car loans, and credit card debt are unable to obtain home loans due to the back-end DTI limit. (See: The 43% DTI cap strongly favors those with no consumer debt) Consumer debt now has a much bigger impact on the housing market than in years past — and that’s a good thing because today’s homebuyers can afford their homes, and they will sustain home ownership far longer than the Ponzis of the housing bubble.

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