On Sunday, The New York Times published a series of articles on The Debt Trap, exploring the surge in consumer debt and the lenders who made it possible.

The main article profiles a Philadelphia woman who made some bad choices, bought into the myth of easy credit, and now finds herself struggling with insurmountable debt. “I regret not dealing with my emotions instead of just shopping,” she says. Through compulsive spending and an unaffordable mortgage, she set herself up for failure — an unexpected medical emergency delivered the knock-out blow.

But borrowers are just one half of the problem. The other part is a financial industry willing to grant more credit than borrowers can possibly repay. Banks know better than the consumers how much debt a person can afford. They have sophisticated statistical models that allow them to predict just how profitable these long-term relationships will be. They want to take on people with debt. It’s easy money.

Stories like this seem to provoke two conflicting responses:

  • Some people argue that banks and credit card companies are predatory, doing what they can to lure people into a life of debt slavery.
  • Others say that the responsibility lies solely with the borrower, that each person in debt gets that way because of personal choice.

I believe both sides are right. I also believe both sides are wrong. This isn’t a black and white issue. It’s complex. People end up deep in debt because they aren’t able to manage money and because the banks know this and are hoping to land lucrative customers. From the article:

“Today the focus for lenders is not so much on consumer loans being repaid, but on the loan as a perpetual earning asset,” said Julie L. Williams, chief counsel of the Comptroller of the Currency, in a March 2005 speech that received little notice at the time.

Lenders have been eager to expand their reach. They have honed sophisticated marketing tactics, gathering personal financial data to tailor their pitches. They have spent hundreds of millions of dollars on advertising campaigns that make debt sound desirable and risk-free.

Our current credit crisis exists because everyone involved was looking for easy money. They wanted to get rich quickly. Banks see perpetual borrowers as an evergreen revenue source. Borrowers look upon credit as “free” money. This combination, as we’re seeing, is a recipe for disaster.

Yesterday at I Will Teach You to Be Rich, Ramit gave his take on the NYT article, writing:

Should we just stop spending so much? Of course we should, but that’s like saying we should all lose weight by making better choices. Easy to say, extremely difficult to do. I’m hopeful that the current environment calls for a restructuring of our priorities. I hope that we get conscious about our spending and start prioritizing saving over spending. With extended hardship, this will become more likely. We all need to be conscious of our finances, but we’re playing in a world with the deck stacked against us.

Is the deck stacked against us? Maybe. But most of us have the power to change the hands we’re dealt. Make smart choices. Spend less than you earn. Don’t buy stuff you cannot afford. Establish an emergency savings account. If you believe you have problems with compulsive spending, get rid of your credit cards. Practicing good money habits can give you a winning hand, even if the deck is stacked against you.

Though banks may be willing to issue you a new credit card or to raise your limits, you do not have to take them up on their offers. They’ll happily lead you toward a life of debt; it’s up to you to take a different path.

For more information on this topic, visit these articles from the archives:

[The New York Times: Given a shovel, Americans dig deeper into debt]