Is it right that being in debt is almost normal now?

Miscellaneous and Personal Stuff I Must Share
1

This thread got me thinking about how being in debt is nothing unusual nowadays - and I believe it’s partly down to credit cards. OK, debt has been with us throughout history, but I believe it’s thought of differently today.

Hire purchase was introduced in the nineteenth century, but until the 1960s the hire companies were entitled to have the goods back unless the debt was paid in full - so the incentive to manage your debt was pretty strong. This principle applied to mortgages too.

Credit cards were introduced to the UK in 1966. Before that, there were, as far as I know, only two ways to borrow money (from a business): banks and loan companies. While it might have been necessary, it was still considered a bit of a stigma. Now, credit card companies encourage us to be in debt, and it is considered to be socially acceptable - if not even desirable.

Managing debt can be difficult and painful. I believe that many debt ridden people are ill equipped to cope with the situation they have placed themselves in. So, should debt be considered more undesirable than it currently is?

The current credit crisis is the perfect exemplar of how not to manage debts well, and the disastrous consequences that follow such bad mamagement.

2

That’s not true. From time immemorial it has been possible (and even acceptable in many cases) to run up an account with a merchant. So you had the goods, and promised to pay later (with or without interest) – i.e., you were borrowing from the merchant, and it was the merchant’s problem about how to finance this. In many cases it would have been financed by the merchant himself, i.e., instead of having capital tied up in stock, it was in tied up in credit extended to customers. Credit cards have generally put an end to that, with two benefits to the merchant: he no longer has capital tied up in loans to customers, and he no longer has worry about bad debts.

I agree with your general argument that many are too much in debt, but you need to get the history right.

3

You’re quite right: I forgot that.

4

Well, as long as there have been privately owned houses, people have been in debt, havn’t they? Yes, I suppose, it seems that cars and houses are just different, but I rather suspect they get counted the same.

5

I’m not saying that there hasn’t always been debt (see my first line), but that it is my contention that it is considered the norm and socially accepted now - and is that correct, and should that be acceptable?

6

I think it is the level of ‘consumer debt’ that is worrisome.
People have always gone into debt for big ticket items (houses and cars) because it’s not realistically possible to save it all up at once, but accumulating debt on everyday things is new.

Most people’s credit card debt is on stuff that should never be financed. Clothes, eating out, etc.

7

Well, I suppose it depends on what kind of debt you’re talking about. Having mortgage debt has pretty much always been more than socially acceptable, even desirable–it’s part of the American Dream. Car payments have always been perceived as sort of a necessary evil. If you include those kinds of debt, it’s absolutely normal and acceptable and encouraged by many government programs to be in debt.

But I get the feeling you mean strictly personal debt. That’s kind of a gray area, really. I think it’s considered normal and acceptable to have some personal debt, yes, and I have no problem with that. Atypical, short-term debts like medical bills, home equity loans, putting part of the wedding on your credit cards, financing furniture, that’s all personal debt that people consider normal and acceptable.

Where it gets murky is when you start talking about a large percentage of personal debt, or ongoing debt you’re not reducing. That’s becoming seen as somewhat more normal, I think, but it’s still typically seen as a bad thing.

8

I think the problem, chiefly, is that credit cards are seen these days as an alternative to cash. You can go out, buy whatever you need, and pay with the plastic without having to have a dime on you. It’s convenient, and you needn’t be worried about having large-ish wads of cash on you for the plucking by thieves, should you be the sort who worries about such things.

I’m guessing that a lot of this credit-as-cash-alternative might have come about before bank machines showed up around the beginning of the 80s (or end of the 70s, whichever), when obtaining the cash you needed when you needed it was much more difficult; you got cash when the banks were open or you went went without. Or you charged it. It was quick, easy, banks didn’t have to be open, and you didn’t need to have cash on you. You could run up the card to whatever degree you needed and then just cut a check for it to pay it down.

I’ll admit I use my credit cards for common things, too. But I can manage my debt just fine, so I’m okay with it, despite knowing I’m paying interest for the privilege. I do carry balances on my cards quite regularly – but again, I know I’m paying for it, and I can manage it. I pay it down when I can, or pay the minimums if I need some extra liquidity that month.

9

I basically agree with what you’ve said here, although accumulating debt on “everyday things” isn’t quite as new as you say (see, for example, the case of Mary Todd Lincoln or Thomas Jefferson).

Credit cards make it so easy to essentially borrow money that some people don’t think that that’s what they’re doing, and they borrow money to buy things that you shouldn’t buy if you don’t have the money for. Then they think of “credit card bills” as sort of an inevitable fact of life, like heating bills, rather than as paying for specific things, like clothes or electronic gadgets or restaurant meals, that they decided to buy (as well as paying for the privilege of having those things without having to hand over cash at the moment of purchase).

10

Certainly being in debt hasn’t changed. Laura Ingalls wrote of the horrible year they experienced when their father borrowed money from the bank for a new plough. He’d just about paid it off and they were looking at actually making a profit on farming for the first time when the locusts came and devoured their crop.
The stress it caused the family was remarkable.

And I think that’s the difference. Back then, not being able to pay back your debt was a Big Deal. Shameful. Embarrassing. People were even thrown in jail for not paying back their debts. Elvis Presley’s father spent time in jail for this, IIRC.

Now, you have a mixed bag. While some people still feel ashamed and stressed by mounting debt, there’s definitely a subset of people who feel absolutely no shame or stress when they can’t pay back what they borrowed. They feel that the “bank” or credit card company is some huge business and feel basically that they are entitled to not pay back what they borrowed if they overextend themselves.

I know one family who knew that bankruptcy was imminent…so they took a trip to Disneyland and maxed out what was left of their credit, knowing full well that it was a “free” trip.

Judge Judy has people on her show every day who borrow money. And when she asks why they haven’t paid back their (friend, aunt, father) for the money they borrow, their defense is “I don’t have any money.”

It’s a sad commentary not just that some people overextend themselves on a regular basis, but that they feel no remorse or shame over their own personal failings.

11

Debt has been a way for anyone selling a good or service to inflate their prices without losing customers. Retailers and service providers have taken advantage of the system and found ways to make their cutomers pay for things they really can’t afford.
Escalating college tuition? Don’t worry, take out a student loan.
No 20% down for a house and you can’t afford an 8% fixed rate? Don’t worry, take out a seperate loan for the 20% and we’ll get you a teaser rate of 3%.
Flatscreen HDTV? Yeah they cost more than that 27" tube you had. But we’re offering 36 month no payments no interest!
Your dental insurance only pays 50% for your root canal? We offer a financing plan for your share of $500!
Payments too high on a 36 month loan for that $30K car you want? No problem, we now offer a 60 month loan!

12

I wonder how much of this acclimation to debt comes from the rise in both college tuition and the percentage of high school seniors who go on to college? Student loan debt is usually the first large debt load that people acquire now. Once you’ve got that 20 or 30,000 in loans stacked up on your shoulders and you learn to carry it without stumbling, it’s easy to start piling extras on top of it until you go that one monthly payment too far.

13

It’s clear that people take on more debt these days than any other time. Back when I was growing up in the 50s, the only major debt was a mortgage and maybe a car loan. Credit cards were limited and usually required that they be paid in full each month (e.g., American Express, Diner’s Club). Stores had charge cards* but, again, you were expected to pay them off each month.

College cost less, so it was easier to save up for it. Loans were available, but not ubiquitous. I remember when they started offering “revolving charges” for appliances in the early 60s. These were the first I saw where you didn’t pay a set amount each month and paid off the loan on a schedule; it worked like credit cards in that you could pay a minimum or more if you wanted.

Credit cards started being popular in the 60s, starting with Master Charge and BankAmericard (there were others, but these were the most successful). Even then, the cards were making a large portion of their money charging merchants (the percentage they charged was much higher than today – maybe 5% then compared to 2% or less now). People tended to pay things off.

Eventually, the credit card companies realized they’d make more money charging interest to their customers. It took off from there (also, in the early days, credit card interest was fully tax-deductible – that was changed, but it didn’t slow anything down).

Now, everyone has debt and there’s no stigma. Advertisers love it, since it allows people to buy more of their product (or higher end products that they wouldn’t have the cash for. And Internet commerce would be next to nothing without credit cards.

I never had student loans, and other than a mortgage (paid off) and car loans (paid off), never had much debt (sometimes when I was out of work, I couldn’t pay the bill in full, but I eventually managed). I pay off my credit cards each month. Our daughter has no student loans, either.

*And charge plates – usually a metal disk.

14

Almost everyone I know has student loans. College is expensive, and not everyone is fortunate enough to receive full scholarships or have parents that are able and willing to sponsor their education. And the fact of the matter is, college is as much a part of the american dream as owning a house. It’s practically ingrained in our culture at this point that you will attend college following high school.

I have ~$30k remaining in Student Loan debt because I wanted to go to a fancy pants college, and my parents spent $0 helping me afford it. But, by my calculations, it’ll be paid by next August and I’ll be debt-free. :smiley:

Lucky for me, my credit is horrible because I have a $19 write-off on a dept store card from when I was 19, so I’m pretty much auto-rejected for any card I’ll ever apply for. Because of that, I haven’t had the opportunity to charge up a storm or buy things I really want that I can’t afford. And that’s been quite a boon to my finances. I know how to save, I know how to budget, and I know how to live within my means (though I guess it helps that spartan-living does not bother me).

I totally understand the ease of swiping a card though, I just think people use the wrong card. 99.9% of my purchases are made using my debit card. The others are coins in a coke machine. Carrying cash is burdensome, and trying to use it at a register even more so. It’s a terrible inconvenience to everybody to pull a wad of money out of your pockets, then try to unwad it and find all the bills you want. So unless they develop some new form of currency before I die, I foresee swiping for the rest of my life.

edit: fixed tags

15

Do any of you know about this history of interest rates?

For example, what might have Laura Ingals Wilder’s dad paid in interest on his plow? What might you have paid in interest on your store tab on Walton’s Mountain during the depression? What were mortgage rates like in the 70’s when my parents bought their house? How much were typical interest rates on credit cards when they first came out?

Also, was it harder to get credit at those times than it is now?

Just thinking about how we’re comparing “now” vs. “then” but not talking about a big chunk of what people face now - interest rates and fees.

16

You have good info, but one nitpick. A card that requires its balance to be paid off after a month is a charge card whereas a card that provides revolving credit is a credit card. In your example, AmEx and Diner’s Club are also charge cards just like the store cards (as well as the Carte Blanche card).

17

You don’t necessarily get charged interest, though. If you pay off the purchases within 3-4 weeks (depending on your card), you don’t get hit with interest charges.

I use my Amex for just about everything (it’s the clear blue card that you can carry a balance on and I get Amex gift cards for every such-n-such amount I spend) - gas, groceries, prescriptions, Target runs, etc. The key is that I treat it like it’s directly tied to my bank account. I debit the amount from my budget for said items*. If I don’t have the money in the budget, it doesn’t get spent. Then I just add up the purchases and pay the card off. It looks like I would gather interest since I never have a zero balance, but I make payments every two weeks and pay it off.

  • There is a monthly budget for gas, for food, etc.
18

This is nothing new; I remember James Burke making the same observation 30+ years ago either in the original Connections or The Day the Universe Changed (IMHO, the better series). IIRC, he was able to connect modern credit cards back to 17th century Dutch merchants.

19

Actually, if you’ve been paying off that student loan in a timely manner, you’d probably have zero trouble getting a credit card. The delinquency was some years ago and the older those get, the less of an impact that has on your creditworthiness.

Not that it’s a bad thing to completely avoid credit (except that down the line if you go for a mortgage, the lack will make things tougher).

Now that is shameful and the family is a bunch of thieves.

They may also have found it wasn’t free after all, I’ve heard that the courts are a lot less likely to forgive debt run up when it was clear to the debtor that bankruptcy was imminent. For just this sort of scenario.

I do agree that it’s become FAR too routine and acceptable to carry debt - sort of a routine monthly expense along with the phone bill and the electric bill. AND, the ease of paying with a credit card is proven to increase spending.

20

Banks have made it easier for you to get into debt. For instance a minimum payment on an outstanding balance of $3,000 may be $75.00 while the minimum payment for an outstanding balance of $10,000 is $120.00.

I have good credit but seeing how shabby the banks have treated me and every other customer in the last two years, I would have no qualms what so ever about declaring bankruptcy. Two years ago, I would’ve thought differently.

People don’t try to save either. I know, I was able to save over $35,000 in three years while earning $33,000/year. Of course I didn’t have a car, which helped, and I lived in a simple studio flat.

The housing boom also contributed to this. In the past we would want to save at least 10% of your gross income per year. So let’s say I made $30,000/year. That means my goal is $3,000/year or $57.70 per week. (Let’s forget taxes to simplify)

But suppose I bought a home in the housing boom. My house may have appreciated very quickly so in one year it was worth $100,000 and the next year it was worth $110,000.

Since it was, THEN, realistic to expect to sell the house for that amount, it was like I made $10,000.

So people said “Well if my house went up in value by $10,000 that is the same as me saving the money. So there is no need for me to save the $3,000”

You see people were using housing, rather their appreciation in the house’s value as their savings, instead of actual savings.

And this worked fine until the current recession came.

Because housing was always climbing in value it became a pyramid scheme of sorts. This is no longer the case.