by Karen Telleen-Lawton, Noozhawk Columnist read the original in Noozhawk by clicking here)
It’s not news that American consumer debt was staggering even before the pandemic. Credit card debt alone exceeded $870 billion in 2019, according to CNBC News. For most of the last decade, the largest credit card balances have been held by people in their 50s.
Professor Stephanie M. Tully at Stanford University’s Graduate School of Business and her corroborators found a wide range in attitudes about consumer debt. Those who view borrowed money such as credit card debt as their own money were more likely to spend it freely.
On the other end of the spectrum, those who understand credit card debt as loans spend it less freely.
“What we found is that people’s feelings about the ownership of money can predict their interest in taking on debt,” Tully said. “It seems some people are fine with going into debt as long as it doesn’t feel like debt.”
Despite the many ways you can slide into holding a credit card balance, the way out is relatively linear. Moreover, it is paved with the wisdom of the ages.
1. Create a budget. If this seems like a punishment, reframe it to yourself as a pathway to knowledge and freedom. “You shall know the truth, and the truth shall set you free.” (New Testament, John 8:32)
2. Adjust your lifestyle so your income covers all your regular expenses plus allocations to periodic expenses, emergencies and savings. A man is rich whose income is larger than his expenses, and he is poor if his expenses are greater than his income. (Anon.)
3. Prioritize debts. If you are working to pay off several loans, order them by interest rate and pay off the highest rate ones first, all else being equal. “A penny saved is two pence clear.” (Benjamin Franklin, “Poor Richard’s Almanack,” 1737.)
4. Pay your bills upon arrival to avoid late fees and carrying charges. In today’s low interest-rate environment, there is no excuse to do otherwise. “Neither a borrower nor a lender be.” (Shakespeare’s “Hamlet,” 1603.)
5. Get help if needed. Nerdwallet outlines sources for low cost or free help by nonprofit credit counselor and creditor forbearance programs.
“It’s much easier to work with them than a debt collector,” said Bruce McClary, a spokesperson for NFCC, a nonprofit focused on credit counseling. “Many creditors can find a way to get you into a product with lower payments and more manageable terms.”
“Don’t be afraid to ask for help when you need it. [It] shows you have the courage to admit when you don’t know something, and to learn something new.” (Barack Obama, circa 2010.)
Credit cards are not a link to your own money but a slippery way to increase debt. If this doesn’t compute for you, your better option is to use debit cards, which draw upon your cash accounts rather than creating debt.
“There are times when debt can be beneficial,” Stanford’s Tully said. “You invest in a home or higher education. But the choice to go into debt over discretionary purchases isn’t a rational calculation, and for many it’s suboptimal.”
In the time of Covid-19, it’s especially important to have a plan. If you were foresighted enough to plan ahead for emergencies such as this, your picture is relatively rosy.
Despite the fact that the stimulus check will be your money and not a loan, treat it as a loan from your future self. Pay it back with actions that will put you back on the track to financial health.
Karen Telleen-Lawton, Noozhawk Columnist
Karen Telleen-Lawton is an eco-writer, sharing information and insights about economics and ecology, finances and the environment. Having recently retired from financial planning and advising, she spends more time exploring the outdoors — and reading and writing about it. The opinions expressed are her own.