The Debtor's Dilemma
Last Saturday I attended a presentation on debt at a church by where I live. A friend of mine is a financial counselor and volunteers to speak at churches, at women's shelters and other venues where people who want professional advice on managing their money can't afford to pay for it.
Debt is a big problem in the United States, and not only at the household level. It's a problem for our government, presently running a record $9 trillion debt. Carrying that much debt makes it hard for government to invest in national assets like infrastructure (remember the bridge that collapsed in Minnesota last year) or our country's most important assets, its people. When individuals carry too much debt, it also makes it difficult to invest in productive assets (e.g. education) that in the long run would increase their economic security and self-sufficiency.
Of course not all debt is bad debt. You can't buy a house without accumulating lots of debt. If you don't have a record of paying down your debts, you have a lot harder time getting credit at reasonable interest rates. To some extent, we all need to carry some amount of debt.
One of the paradoxes about being poor is that you pay more for credit in the form of higher interest rates. When you think about it, if anyone needs credit at low interest it's poor people. Lending to the poor entails more risk to creditors, and this is why the credit industry says they have to charge poor people higher interest. The poor get into trouble paying down debt because that's the nature of being poor, living from paycheck to paycheck. It all seems like a self-fulfilling prophecy if you ask me, but hey I'm just a guy who works at a nonprofit.
Much of the presentation on Saturday focused on credit cards and how lenders use a raft of tactics to make it hard for people to escape paying their debts. I knew something about this already, but I was still shocked by some of the stories I heard. A woman said she had three credit cards, two of which she was trying to pay off and close out, and finally when she did, a month apart, she found shortly thereafter that her credit score worsened. It happens, my friend admitted, and that's why she advises her clients never to close out multiple credit cards less than six months apaprt, even if they have a zero balance. I know I wasn't the only one in the room whose jaw dropped to the floor after hearing that one.
Why people accumulate unsustainable debt burdens wasn't the subject of my friend's talk, but afterwards we discussed this over a cup of coffee just the two of us. Sure some people spend money frivolously, my friend said, but that's not why most people get crushed by debt. She finds the biggest source of unsustainable household debt is health care expenses. This confirms reports I've been reading about personal bankruptcy. When one in six Americans is lacking health insurance, it isn't hard to understand why bankruptcy and health care expenses go hand in hand.
People lose their job and with it goes the health insurance. Or they have a job that doesn't provide health insurance. Or the premiums are too high and they can't afford to purchase the insurance. They get sick, or a child gets sick, and the choice is no longer the balancing act their lives were before. At this point, they've just fallen off the tight rope. Paying the health care bills stresses others areas of their budget, like food, fuel, electricity, car payments, tuition payments, child care, you name it, so they pull out the credit card and the debts start to mount...the end result is as predictable as it is tragic.
The New York Times ran a story on Sunday about the cost of health care and how even people with insurance can't afford to get sick and are not immune to the debt trap. Your child has strep. Your migraines make it impossible to stand on your feet your next eight-hour shift. Is there a choice? You reach for the credit card again. It's your reality.
Verify your Comment
Previewing your Comment
This is only a preview. Your comment has not yet been posted.
As a final step before posting your comment, enter the letters and numbers you see in the image below. This prevents automated programs from posting comments.
Having trouble reading this image? View an alternate.
TrackBack
TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341d945753ef00e55210937b8833
Listed below are links to weblogs that reference The Debtor's Dilemma:
Hunger HotSpots
Stay Connected
 |
 |
Comments