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Author: WadaPhooliam Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 308519  
Subject: CC Debt = Annual Gross Income? Date: 6/5/1998 3:32 PM
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I've wanted to ask this question for a long time. How do people run up such massive credit card debt? Don't alarm bells go off at a certain point?? Granted, the CC issuers are ever ready to give one the capacity to spend far beyond one's means (and we won't mention the touters of home equity lines of credit here), but just how does one spend oneself into a corner?

Case in point: Elizanne's friend. Gross income of $65K, CC debt of $50k, and a car loan with an outstanding balance of around $10K. At least the car loan is secured.

At 18%, the interest payments alone come to $750/month. My wife and I own a house in Maine to which we hope to semi-retire in a couple of years. The mortgage payment, taxes, insurance, and PMI (private mortgage insurance) come to about $795/month. The PMI will be removed (about $45/month) this summer as we made some improvements to the house that have upped our equity to over 20% of the selling price of the house. Elizanne's friend is paying in interest alone an amount equal to our house payment, and we get an APPRECIABLE asset as well as a place to relax and enjoy ourselves as long as we own the place. Oh, by the way, the improvements also gave the place bed and breakfast income generating capability.

My wife and I are not Prodigious Accumulators of Wealth as defined in "The Millionaire Next Door", a book I highly recommend to everybody. We just have never spent more than we made, so it's very difficult for me to fathom how one could run up massive debts without there being an external cause (i.e. some kind of financially traumatic experience).

Please don't get me wrong, I'm not trying to trash people, I just am curious as to how it happens. I have a great deal of admiration for people who have managed to pay off their debts and stay out of debt, or who are taking the responsible road and are well on their way to being debt free.
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Author: HelloWorld Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2100 of 308519
Subject: Re: CC Debt = Annual Gross Income? Date: 6/5/1998 4:20 PM
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>> "The Millionaire Next Door", a book I highly recommend to everybody. <<

I'll second that!

>> I just am curious as to how it happens. <<

As for me and my wife, a couple of moderate expenses over a few years added up. Trust me, we didn't end up 30K in debt by charging a 25K vacation! There always seemed to be plenty of time to pay things off.

Due to lack of funding, I lost my assistantship during my last year of grad school and had to live off my credit cards for 3 months. That did about $3,500 in damage. Then, due to lack of dental insurance in grad school, I had to cough up $2,000 for some root canals. Since my debt didn't seem "that bad" (at least not at the time) I went and charged a $2,000 computer after graduation. Then I needed professional clothing for my new job, a bed to sleep on, yada, yada, yada.

My wife is a teacher. When she took a job with Dallas Public Schools, they wouldn't pay her relocation expenses to move from Boston. She, too, needed a bed to sleep on and basic furniture (please accept my loose usage of the word "need").

All of this was followed by needing to pay for our own wedding - and, hey, it was nothing extravagant at $5,000. Sure, we could have eloped, but emotionally we couldn't justify doing this.

Feel free to pass judgement on our choices, I'd probably agree with you a lot. Had we accepted a more modest lifestyle (secondhand furniture instead of new, etc.) we could have cut our original debt in half. Unfortunately, few individual purchases seemed extravagant at the time - only when totalled up did it become ominous. Had we been more frugal, about 15K of debt would have been unavoidable but not bothersome - just the result of being a recent grad starting a career. The other 15K was just carelessness.

We always thought we'd get serious about paying the debt down when we got that next bonus, raise, whatever. But, somehow those windfalls got spent long before they were received.

Another tough part for me was going from an 11k/yr assistantship to a 55K/yr "real" job. It just seemed like so much money (at the time) that I didn't think I could possibly spend it all. I had absolutely no experience budgeting that kind of income, and I blew it!

Had we buckled down early enough we could have killed the debt pretty quickly. But, instead, we ate out 4 nights a week, got premium cable channels we never watched, and just plain bought stupid "stuff." Since we had multiple cards and never added up the balances, we had no way of knowing if our total debt was going up, down, or sideways. (That's why I'm now a fan of Quicken - I could track our debt and see if we were really making progress).

Our problem was due largely from living paycheck to paycheck because we had stretched ourselves so thin with self-pampering. When large expenses caused us to use our credit cards, we had no means of paying it back down - unless we cut back on our standard of living we wouldn't do for a long, long time.

--Mike

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Author: WadaPhooliam Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2109 of 308519
Subject: Re: CC Debt = Annual Gross Income? Date: 6/5/1998 4:59 PM
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Hi Mike(HelloWorld),

It wouldn't surprise me if a lot of the answers to my question would fall along the same lines as yours. Nobody intentionally goes into CC debt and it isn't one major purchase that does it. These things can be insidious and sneak up on you while you're not really looking. I think that may be what the CC companies are banking on.



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Author: HelloWorld Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2111 of 308519
Subject: Re: CC Debt = Annual Gross Income? Date: 6/5/1998 5:10 PM
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>> These things can be insidious and sneak up on you while you're not really looking. I think that may be what the CC companies are banking on. <<

After talking with acquaintances and people at work, I've developed a theory.

I suspect some people pay only the minimum payment even if they have plenty of extra money. Perhaps the thought process is "why pay more than I have to?" To some people, paying more than the minimum payment on a CC might seem as silly as paying an extra $20 on the phone bill.

As a result, they aren't _really_ paying off their monthly expenses. They see a bunch of money left over in the checking account and figure it's okay to spend it. Slowly but surely, the minimum payment grows and the "discretionary" money shrinks until there's nothing left.

I never thought like this, but _still_ ended up in trouble! However, this might explain how some of us get in over our heads _without_ large, unexpected expenses.

Another Fool, I forget who, has this as their personal quote:

"Those who understand compound interest will earn it, those who don't will pay it."

Hey, I like that!

--Mike

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Author: WadaPhooliam Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2112 of 308519
Subject: Re: CC Debt = Annual Gross Income? Date: 6/5/1998 5:34 PM
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HelloWorld opines:

<<I suspect some people pay only the minimum payment even if they have
plenty of extra money. Perhaps the thought process is "why pay more than I
have to?" To some people, paying more than the minimum payment on a CC
might seem as silly as paying an extra $20 on the phone bill. >>

Maybe I should talk to the family bill payer (my wife). She will often pay more than is due (at least with CC's) in anticipation of next month's bill. On the other hand, if it's gone toward next month's bill, it can't be spent frivously (say, on KTEL stock).

If I could only figure out a way to get the CC issuers to PAY 18% - 24% on credit balances. I'd give 'em as much money as I could afford! Now there would be a Dow beating investment!!

BTW, my daughter got a an offer for a Titanium card from First USA today (some of her mail still comes here). She opened it, showed it to me, laughed, and then ran it through the shredder. I think I'm insulted. I make 4 times what she makes and the best I've been able to do is Platinum. On the other hand, I don't read the damned things so maybe I have been offered Titanium without realizing it.

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Author: HelloWorld Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2113 of 308519
Subject: Re: CC Debt = Annual Gross Income? Date: 6/5/1998 5:49 PM
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>> BTW, my daughter got a an offer for a Titanium card from First USA today (some of her mail still comes here). She opened it, showed it to me, laughed, and then ran it through the shredder. I think I'm insulted. I make 4 times what she makes and the best I've been able to do is Platinum. <<

I know how you feel! One day I got offered an MBNA Gold card - the same day an MBNA Platinum card offer came in - for my _cat_! No joke - my cat.

Curious? Here's the story:
http://web2.airmail.net/gavaghan/maxscard.html

--Mike

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Author: ramdom Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2114 of 308519
Subject: Re: CC Debt = Annual Gross Income? Date: 6/5/1998 6:01 PM
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Well, not to generalise, but as someone said,
it's mostly a lack of discipline. I think if you
don't know how much you owe at each step, you
end up owing more and more.

I used to get a credit every time I needed money
and my current limits had reached the max. As someone
also said, I only paid the minimum without caring
about finance charges or how much I owed (I always
thought I should live it while I was young and
pay it back when people were rewarding me more for
the things I was doing).

I think once you acquire the discipline of keeping
track of how much you owe, you go a long way in paying
it off.

Also, carrying many cards (or having them easily
accessible) lets you make major purchases instantly.

Finally, I think spending gives people a temporary
high---it's an addiction of sorts. Using credit
cards I think can be addictive.


--Ram



is generally


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Author: pwyles Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2116 of 308519
Subject: Re: CC Debt = Annual Gross Income? Date: 6/5/1998 6:50 PM
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>> "The Millionaire Next Door", a book I highly recommend to everybody. <<

I agree and would like to add "The Richest Man In Babylon" to the book list. I "read" the tape version.

Acronyms from "The Millionaire Next Door"

PAW - Prodigous Accumulator of Wealth
AAW - Average Accumulator of Wealth
UAW - Under Accumulator of Wealth

>> I just am curious as to how it happens. <<

Living at/above your means.

When you live most months right at your means and save nothing if something comes up Charge It! For only that one month you lived above your means, Yeah Right!

Half our debt is somewhat extravegant purchases made over 10 years. Some of it is medical bills (the 20% insurance didn't cover). Some of it is car repairs, I have had to put tires and a muffler on every car I have owned.

I am decendant from a long line of PAW's
My wife is decendant from a long line of UAW's

Before I got married I got in over my head, saw the red flags, and became debt free I never made it to PAW catagory, but was headed that way. In some ways our current debt troubles are the result of what happens when a PAW marries a UAW. To keep marital harmony I conceeded and made some foolich (lowercase f) purchases. I also made some foolish purchases of my own. To make a long story longer it took 10 years before my wife and I started going in the same direction. That was two years ago when we vowed there would be NO NEW DEBT. It has been in the last six months that we have truely been walking in sync with each other to be debt free. At it's worst, total debt was about half of income. Now we should be debt free in about two and half to three years.

Their are still luxeries we haven't given up in our quest to become debt free, but we are frugal in general.

The Luxuries: Cable TV, two phone lines

Frugal Behaviours:
Haircuts from mom
brown bag it
perform own car repairs mostly
shop mark down bins
buy used cars and drive until wheels fall off
buy in bulk
energy conservation (weather stripping, chaulking, turn off lights)
Family/Season passes (typicaly second trip pays for pass, then rest of year is free)
Picnic at zoo instead of paying $3.00 for small order of fries
my shirts are seconds
I sew

~~paul

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Author: sam4d Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2117 of 308519
Subject: Re: CC Debt = Annual Gross Income? Date: 6/5/1998 8:31 PM
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WaddaPhooliam
I live in Maine now. I think that the greatest contributor to cc debt is looking at monthly payments instead of debt or total outlay. When someone totals their bills, they almost always total low and when they have discretionary money left over, they feel comfortable commiting some of that. That is the reason that car salesmen will ask "What do you want your payment to be?"
After awhile the total has crept or leaped up and you are struggling to stay afloat.
JMHO
Stan

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Author: sam4d Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2118 of 308519
Subject: Re: CC Debt = Annual Gross Income? Date: 6/5/1998 8:46 PM
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paul
This is a really good point. Both partners (and kids too, to a lesser degree) need to be aware of the path to financial independence. I know couples that actually compete to see who gets to spend the majority of the pay check.
Stan

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Author: Einecbn Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2119 of 308519
Subject: Re: CC Debt = Annual Gross Income? Date: 6/5/1998 9:49 PM
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Accumulating debt can be easy- little things here and there just add up: going out for lunch, splurging on wine for a dinner, car repairs, a vacation, impulse buys...not to mention more uncontrolled, serious debts such as medical bills, irresponsible ex-spouses, bad breaks, etc. There are endless ways and many predicaments which get people in debt. But ultimately, you should be responsible, accountable and in control of your finances.

My guess is two-fold:
1) The interest rates kill you and they silently accumulate. You hardly notice a coupla bucks every month because it's a relatively small % of the total balance.

2) The % of debt you add once you are in debt is much smaller than if you weren't (I know this isn't grammatically correct). I have no debts and refuse to compromise today's purchases with next month's paycheck. So say my current month's CC bill runs about $600 for which I intend to use my paycheck to pay off. If I wanted to buy a new TV for $400, I'd definitely think twice about that potentially putting me in the negative for the next few months (after rent, bills, savings, etc). Now if I had $4000 in CC debt, what's the big deal?!? What's an extra hundred dollars when I already owe that much?

I think that's the philosophy and justification some people have for spending above their means. Tragically, $400 is $400, but they deceive themselves into thinking that it's less.

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Author: funkychair Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2120 of 308519
Subject: Re: CC Debt = Annual Gross Income? Date: 6/5/1998 10:19 PM
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I remember my first credit card. I was 18 going off to college and I was preapproved for a Visa. My parents told me to throw it out, so I filled out the application and got a limit of $500. The great thing was I only had to pay $10 a month. I remember that thinking. No matter whether I borrowed $50 or $500, I only had to pay $10 a month. I felt like I had discovered some great deal in life.

So I maxed it out like there was no tommorow. I always paid my $10 a month.

At the first parents weekend I went out to dinner with a friend and she told her family about my credit card, I think she wanted one too. Her father laughed and said the credit card company loved people like me. I felt like that was good because they were giving me free money.

I thought like this for a long time. Every credit limit increase, every new card was more free money for only $10, $20, $30 a month.

Then I got the American Express. I charged about $1500 on it in one month. 2 pairs of shoes that I still own were in that purchase. I also still have a blanket that the mall gave me for charging over $1000 in one day. I asked my parents for help. They had no idea what kind of trouble I was really getting myself into.

It wasn't so much a lack of discipline as a lack of imagining that I would ever have to pay them off. I really truly beleived that I would pay the minimums forever. I didn't worry about it.

Even when I started to worry about it, I didn't know what to do. My lifestyle stayed the same and I accrued more debt.

With no income, as a college student, about 20K of credit on CC's was made available to me. That's not including student loans.

A lot of my friends also fell into debt. Some of them only for one month. Some caught it junior year and got their parents help. Some paid it all off with that first job after college. Some, like me, are still paying it off. And some are still charging.

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Author: Kari One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2127 of 308519
Subject: Re: CC Debt = Annual Gross Income? Date: 6/6/1998 6:08 AM
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--------
I remember my first credit card. I was 18 going off to college and I was preapproved for a Visa. My parents told me to throw it out, so I filled out the application and got a limit of $500. The great thing was I only had to pay $10 a month. I remember that thinking. No matter whether I borrowed $50 or $500, I only had to pay $10 a month. I felt like I had discovered some great deal in life.
-------

I read this paragraph and I realized why I always come to this board first. Some of us have parents that are financially challenged. I grew up with parents that didn't believe in life insurance or saving for retirement. My parents always had 10+ gold credit cards. When the equity in their house would go up (either by evaluation or by making payments), they would take out a loan on their home.

I am constantly told to get a gold card and use it. I have one regular card with a $1000 limit. I am also baggered about why I took out a 15 year loan on my home and am on a schedule to pay it off in under 10 years. My parents think 125% home loans are a good thing. And they certainly don't understand why I put 17% (the maximum) into my 401k.

I know how easy it is for people to get into high credit card debt. I also know what that credit card debt can do to a family. I come here for a different and (what I feel is) sane point of view on credit card debts. For me I not only get pressure from the charge companies, advertisements, society, but even from my parents to go into debt. The really bad part is at times I feel like a recovering alcoholic. I am afraid if I put one charge on my card then there will be another and another.

So to answer the gentleman's question about how a person can get credit card debt that equals their annual salary. Some of us are raised to think that is normal.

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Author: WadaPhooliam Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2130 of 308519
Subject: Re: CC Debt = Annual Gross Income? Date: 6/6/1998 2:00 PM
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<<I am constantly told to get a gold card and use it. I have one regular card
with a $1000 limit. I am also baggered about why I took out a 15 year loan
on my home and am on a schedule to pay it off in under 10 years. My
parents think 125% home loans are a good thing. And they certainly don't
understand why I put 17% (the maximum) into my 401k.

I know how easy it is for people to get into high credit card debt. I also
know what that credit card debt can do to a family. I come here for a
different and (what I feel is) sane point of view on credit card debts. For
me I not only get pressure from the charge companies, advertisements,
society, but even from my parents to go into debt. The really bad part is at
times I feel like a recovering alcoholic. I am afraid if I put one charge on
my card then there will be another and another. >>

Kari,

Wow, that's a new wrinkle. Having your parents pressure you into a debt-ridden life style must be tough to handle, especially when your parents can't see the value of building equity in anything. How do they plan to live in retirement, or do they even think about it? Actually I think I can answer that question myself. They'll probably expect their financially well off daughter to support them in their old age. I know it sounds cold, but were I a betting man, that's the scenario I'd bet on.

I was going to say that using a credit card doesn't have to lead to a downward debt spiral. If you have the discipline to pay off the balance every month, CC's do have their advantages (or AAdvantages in our case- American Airlines frequent flyer miles). However, since you seem to have a healthy dose of creditcardophobia and I can't really think of a downside to same, go for the frugality and prosper.

Regards,

Mike

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Author: TMFRunkle Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2135 of 308519
Subject: Re: CC Debt = Annual Gross Income? Date: 6/6/1998 5:07 PM
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>>>> "The Millionaire Next Door", a book I highly recommend to everybody. <<

I'll second that!

>> I just am curious as to how it happens. <<<<

I'd like to add my two cents to this discussion too - my wife and I were VERY frugal when I was in school, and when I graduated the debt cycle started. There were the two new suits that I "had" to have for job interviews. New furniture for the new house. New baby, with clothes, baby stuff etc.

The killer was our move back to the DC area. It was supposed to be a great move up for me, at least I let my relatives down there convince me. It meant twice as much mortgage for half as much house. Then, new furniture again. Worse yet, I took an advance on my pay, and this started coming out all at once.

I moved to DC on a temporary one year active duty tour with the Air Force (I was in the Air National Guard). The tour ended, and I got a job with an engineering firm. The guy that hired me talked me into a pay cut, that he assured me wouldn't hurt - heck I'd make up more than the difference in overtime. Too bad they lost their main client, and it was hard to stay busy 40 hours a week. I didn't make enough to cover the mortgage and groceries.

I switched jobs, but the damage was done. It took years to recover. Of course, three years after this fiasco, I got laid off and had to move here to Pittsburgh. The worst part about this is that day to day expenses still happen, plus the usual emergencies. Going into debt seems to happen slowly, without you realizing its happening. The little "extras" add up. Plus, there is subtle peer pressure that you don't realize to spend money. The clothes you wear, the social functions you attend, the car you drive.

So many times expert marketing people push you too. I just called the phone company yesterday, my bill is too high. I have two lines, one for internet, the other personal. We had "Metropolitan" and "Extended" service on the Internet line because of expert marketing pressure. I cut it back to basic. The guy tried to sell me call waiting (I really need that, he said), plus voice mail, plus voice dialing. He would not give up, but I didn' sucker. The cable company is forever trying to sell you something, and don't forget the extended warranties people try to sell you.

It's death by a thousand cuts, and it all adds up.

George


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Author: PSUEngineerFool Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2147 of 308519
Subject: Re: CC Debt = Annual Gross Income? Date: 6/8/1998 10:32 AM
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I don't think there is any one reason why people get into CC debt. I do agree with Pwyles that different personalities in regards to spending and saving for married couples lead to problems. But sometimes couples that are average to good savers get in trouble. This is where communication comes in. If there is a lack of communication between the couple, they may not realize that CC debt is building. Money is one of the hardest things to discussion in alot of marriages.

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Author: Crazyfred Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2154 of 308519
Subject: Re: CC Debt = Annual Gross Income? Date: 6/8/1998 2:45 PM
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Both my parents are college educated people, and live rather well. When I went off to college, and became independent, I had to take a cut in lifestyle -- an undergraduate college student will not make as much as an experienced graduate will. I remember my first apartment, and thinking 'this hole is all I can afford?" It was quite a shock. Never did try to live above my income, but can see where it could occur there.

Crazyfred

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