Handling Finances

I hate debt. I’ve come to see debt — even culturally and financially sensible debt like mortgages — as universally bad, to be endured when necessary but eliminated as soon as possible. Some of this can be attributed to my upbringing with two highly-educated, working parents who both grew up in families with little money. My parents taught me how avoiding expensive (and little-used) toys, cooking dinner every night, and by camping in Pensacola, Florida rather than splurging at Disney World, we could afford more experiences, more vacations and not sacrifice one tiny bit of fun or happiness (though I don’t think I understood when they first refused my request for a Nintendo). I feel rather lucky for having grown up with my family’s financial wisdom.

In reading some books on the history of credit cards and consumer debt, I’ve come to realize that this is a rather shallow view of the subject. While the vast majority of debtors in this culture have simply used debt to be able to live beyond their means without considering that debt siply serves to increase the cost of expenses, there are significant circumstances where debt makes sense and credit cards can create opportunities.

While I grew up generally feeling that debt was Bad, I never thought all debt was equally bad. Mortgages are pretty culturally acceptable and with reasonably low rates as well as largely respectable lenders, I don’t see them as particularly negative. On the other extreme, payday loans, which are largely marketed to the poor with extremely high interest rates (like over 300% APR) are about as bad as it gets. I’m focusing on credit cards here because they’ve become nearly universal in our society and are controversially seen by some as anathema and by others as a good way to finance a new TV.

When credit card debt makes sense

Credit card debt makes good sense for many new small businesses. Without a significant history of earnings, it is often extremely difficult for people starting a business to find loans — especially for operating capital. When working with large bureaucracies like the government, payment can be delayed a number of months after the contract is completed. The easily obtained credit via credit cards can allow continued operation while waiting for payment.

To be fair, credit card debt can also make sense for the general consumer when the costs are known and there is a concrete plan in place to pay off the debt. I have not yet experienced a situation where I would willingly pay 17% instead of saving patiently, but I can imagine that if a relative were very sick I might want to fly to visit immediately. As I have yet to build up enough savings to cover such an expense, I could fund it with my credit card and simply pay it back over the next few months.

Totally aside from business and emergencies, I can also imagine a time when somebody were willing to pay 20% more for a television or washing machine. I wouldn’t do it myself, but as long as they understood the ultimate cost and knew how they were going to pay it back, I’m not in a position to pass judgment.

When to run away

You should avoid credit card debt like the plague if you are not willing to sit down and figure out how much extra it will cost to finance your expenses and you know exactly how you will pay for the expense as well as how long it will take. Financing with the amorphous goal of “paying it back later” is a sure way to incur more debt than is wise. Similarly, building a plan for emergencies like a job loss is extremely important — when you have debt hanging over your head, simply cutting back expenses doesn’t work to keep outgoing cash flow very low.

Quite simply, if you don’t know exactly how long it will take to pay off the debt, how much extra the debt will cost, and also have a plan for an unexpected drain on your finances, you should cut up your credit cards and avoid credit card debt at all costs.

As for me, I will continue to use my credit card (yes, I only have one) because it’s the easiest way for me to track my expenses and a very convenient way to pay for things. At the same time, I will continue to avoid credit card debt at all costs. While I might never understand why people choose credit card debt, or why they think they can choose not to carefully consider the implications of high interest-rate debt, I can accept that they can make their own choices. I also know that there is a significant portion of debtors who wrongly assumed that “pre-approved” meant the bank thought you were capable of paying back the loan or were simply tricked into using the debt by banks who know that ignorance is the most profitable trait in a customer. Whatever the reason, I certainly won’t allow my negative feelings toward debt to extend to those who have debt!

This entry was posted on Monday, February 4th, 2008 at 7:13 am and is filed under Credit Cards, Debt. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.