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:
- How to get out of debt
- A review of Maxed Out, a film about the the credit industry
- The giant pool of money: Anatomy of the subprime mortgage mess
- The secret history of the credit card
[The New York Times: Given a shovel, Americans dig deeper into debt]
This article is about Credit Cards, Debt, Economics, News
SEARCH FOR RECENT ARTICLES
This is a great set of videos by NOW on what’s going on with credit and mortgage bubbles. I was particularly struck by William Greider’s interview.
http://www.pbs.org/moyers/journal/07182008/watch2.html
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@Ross Williams
“No, are you confusing Visa and Master Card with the credit card industry? I am talking about the profits those companies make by charging interest and fees to people they trap into borrowing money from them. ”
Which companies exactly are making “record” profits right now? Banks are not making profits – yes most of their losses are due to home loans, but as American Express’ profit showed, there are some credit card losses as well. American Express’ portfolio doesn’t include mortgages, and even though their credit card business is catering to somewhat better off crowd, they still have write-offs. The only other two companies in credit card industry are Visa and Master Card and neither of these companies makes anything off interest or lose anything on bad loans, their profit is entirely made off 2 or 3% that merchants are paying them on both credit and debit cards that carry Visa or MC logo. So their profit, record or not, is irrelevant – they would make the same amount of money even if everyone switches to debit cards tomorrow. This only leaves Discover that as far as I know hasn’t had stellar profits either.
So pray tell me which company in “credit card industry” is making “record profits” right now? Excluding Visa and Master Card as they aren’t involve in any kind of interest-charging business.
Incidentally, when companies in “credit card industry” are losing money because of bad debt, who do you think suffer? Who is likely to be laid off? Those who make policies that you don’t like or employees who have absolutely nothing to do with loans – all the way from higher paid mathematicians and IT personnel to the lower paid tellers. So when you don’t repay your loans, it those people whom you make suffer. Now this is very compassionate, isn’t it.
And when banks fail, all of us suffer in one way or another.
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@Ross Williams: “There are plenty of adults who wouldn’t even be able to figure out how you came up with the 1.3 from a 30% interest rate once they saw your calculation, much less figure out to do the calculation on their own.”
Just yesterday a question that involved percentages was asked on “Are you smarter than the 5th grader”. Guess what – every single 5th grader in a “class” got it as well as the person who was playing. So are you saying that plenty of adults don’t know math at a 5th grade level? Pretty sad comment on a state of education in the US.
@xysea: somehow most of your posts shifted from the issue of responsibility for the credit card debt to the issue of empathy towards those less fortunate than we are. With everyone who doesn’t agree with you about the credit card “trapping” people is lacking empathy and is generally not a nice person.
I think these are separate issues. If you are at a beach and some guy dives head first into waves near the shore and hurts himself, you would feel sorry for the person, you’d probably feel very bad, but you’d still feel he is responsible, right? Assuming it is a thinking adult and is in the right mind.
I can feel sorry for someone and still feel that his problems are his fault and not those of credit card companies. Someone I know got into credit card debt after the internet bubble burst because of margin trading. Wanted to avoid the margin call and liquidation of all portfolio at low prices and transferred the amount owed to the broker to credit cards. Did I feel sorry for the person – sure. But I still feel it was his fault and not that of the credit card company. After all he knew about the risks when he started buying stocks on margin.
Yes I feel sorry for some people, although, it is fair to say not for everyone. Not for a woman earning 150K who has garage full of cars, a personal trainer and a closet full of shoes and is in debt. But barring illness or other unforeseen circumstances, I believe that in most cases it is still people’s own choice that got them into debt and not “being trapped” by credit card companies. There are ways to deal with emotional or compulsive shopping – find some hobby, avoid stores, and yes, cut up credit cards. Recovering alcoholics avoid wine and compulsive gamblers shouldn’t go to the casinos.
As to cases of illness, if someone needs money for, for example, life-saving treatment and has none in savings and no friends to borrow from where would this person even be without credit cards? Being broke and in debt is preferable to being dead, at least for most of us.
Do you feel sorry for compulsive gamblers? Probably. Do you think all casinos shall close because they “trap” people with all their advertising?
Shall we stop all advertising too?
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Which companies exactly are making “record” profits right now?
According to this article
http://www.time.com/time/magazine/article/0,9171,1715293,00.html
“industry profits have risen from $27.4 billion in 2003 to $40.7 billion in 2007, according to RK Hammer.”
With a 50% increase in profits industry-wide I would guess just about every credit card issuer has been making record profits. They can’t go up forever of course.
even though their credit card business is catering to somewhat better off crowd
That kind of tells you something doesn’t it? Those folks are much less likely to get trapped in the debt cycle.
So are you saying that plenty of adults don’t know math at a 5th grade level?
So when is one of these folks going to use their 5th grade education to actually calculate the cost of buying something on credit and paying it off making the minimum payment. The reality is this is not a 5th grade math problem.
In fact, the people here who are defending predatory lending don’t know the answer. They just keep saying its really, really obvious. Any fifth grader can figure it out in their head.
I’ll make it easy. If someone makes a minimum payment of 3% of their monthly balance and they are paying 30% interest. What is the total cost of each dollar they borrow? $2, $5 $10? Is that Big Mac they are put on their credit card at lunch costing them $5 or $10 or $50 or more? Afterall, the answer is really really obvious to anyone with a 5th grade education.
The reality is that if people fully understood or if the credit card companies clearly disclosed, the full cost of borrowing, many of them would not be caught in the debt trap.
employees who have absolutely nothing to do with loans
Why would banks hire people to do work that has absolutely nothing to do with loans and then lay them off when the loans went bad? Employers hire people to help them make money, whether its a bank or organized crime. You are making a patently silly argument.
Do you think all casinos shall close because they “trap” people with all their advertising?
At least Casino’s give people a chance to win. And they market themselves as entertainment, not a financial service.
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Ross Williams,
You are intentionally being deceptive. The entire sub-debate about what education level is necessary to understand interest payments came from the following comment made by YOU in response to Adam’s formula in comment 138:
“There are plenty of adults who wouldn’t even be able to figure out how you came up with the 1.3 from a 30% interest rate once they saw your calculation, much less figure out to do the calculation on their own.”
Others then responded with the fact that children learn things like “adding 30% means multiply by 1.3″ in 5th grade. (I don’t think anybody claimed they learn continuously compounding interest, and for our purposes simple interest is close enough.)
Now you are purposely switching the argument to “5th grade math isn’t enough to calculate the exact total cost of borrowing a dollar”, as if that matters. Nobody made that claim to begin with.
I’d like to see you respond the original claims — that calculating an estimate of your payment is not hard, that calculating the effect of that payment on your total debt is not hard, that extrapolating that to “gee, paying the minimum means it will take a long time to finish paying it off” is not hard, and that anybody who remembers basic 5th grade math should be able to do all those tasks.
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“even though their credit card business is catering to somewhat better off crowd
That kind of tells you something doesn’t it? Those folks are much less likely to get trapped in the debt cycle. ”
Exactly. If even American Express that is catering to the crowd that is less likely to be “trapped” has write loan-related write offs, than what can you say about other companies?
You are listing an article from 2007 from Time which just uses generic words and no real data. I, on the other hand, read actual earning reports from today, from 2008. And they tell a completely different story.
Go to finance.yahoo.com, look at AXP and see for yourself. Then check a few banks.
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The entire sub-debate about what education level is necessary to understand interest payments came from the following comment made by YOU
Here is the full comment by me:
“Are you serious? That calculation doesn’t even begin to tell you how much you will end up paying. You apparently don’t know how to calculate the exact number any better than I do.
There are plenty of adults who wouldn’t even be able to figure out how you came up with the 1.3 from a 30% interest rate once they saw your calculation, much less figure out to do the calculation on their own.
And in real life you can’t even make that calculation because you don’t have a fixed balance. Have you read the description on your credit card statement for calculating your daily balance? I don’t think it is comprehensible, although I am sure if you had a couple weeks to waste studying it you could figure it out.
If you borrow $1000 and pay it back at $20 per month then it will take you roughly 4 years to pay it off. Most people don’t understand the power of compounded interest. The credit card companies understand that and take advantage of it. “
So yes, I did say they wouldn’t understand how you get 1.3 from 30%. And I stand by that statement. But it is also said it was almost completely irrelevant to the question of understanding the cost of credit. Because, in fact, being able to calculate “percentages”, which 1.3 is not, is not remotely the same as understanding compound interest or the cost of credit.
Moreover, even if people undersand how you got 1.3 it wouldn’t be accurate, would it? Because those monthly payments would reduce the principal.
I’d like to see you respond the original claims — that calculating an estimate of your payment is not hard, that calculating the effect of that payment on your total debt is not hard, that extrapolating that to “gee, paying the minimum means it will take a long time to finish paying it off” is not hard, and that anybody who remembers basic 5th grade math should be able to do all those tasks.
Let me suggest that you are simply ducking the issue I actually raised by focusing on a sideshow.
The issue is not whether the information can be calculated, anyone with a calculator can do the math. The issue is whether it is reasonable to expect that people making decisions to use credit will do so. Your argument is that it is obvious to anyone with a fifth grade education that the critical issue is how much interest they are going to pay. That anyone with a 5th grade education will immediately understand that and carefully calculate how much of their monthly payment is going to principal and how much to interest. And, from that information alone, anyone with a fifth grade education will have a pretty good idea of how much something they buy on credit is actually costing them.
I think that is pure hooey and absurd on its face. Its not true of people with fifth grade educations, its probably not even true of most people with a college education, unless they took finance classes.
Most of us know whether we are going to be paying our mortgage for a “long time”, but we also know whether it is 15 years, 30 years or 40 years. We wouldn’t take out a car loan where the lender didn’t specify how many payments we would have to make. Payday loans are clearer about the actual costs than most credit cards.
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Exactly. If even American Express that is catering to the crowd that is less likely to be “trapped” has write loan-related write offs, than what can you say about other companies?
You really aren’t paying attention are you? By the time they “write off” loans, the credit card companies have often collected in interest and fees several times the amount the person borrowed. Yeh, they take a loss on their books when they write it off, but they made a profit on the loan.
The business model is to loan people money and have them pay interest on it for as long as possible. They make more money if a person makes payments for 10 years and then they “write off” the remainder, than if the person pays the loan off in six months. Write offs are just part of the cost of doing business and figured into the interest they charge.
You are listing an article from 2007
The story is from February 21, 2008. You, on the other hand, are cherry picking six months worth of data from one company. It may be that credit card companies will have to write off a bunch of loans because they have run the string out on a lot of people. That will reduce their profits for a while on paper. That doesn’t change the fact that the industry has been experiencing record profits. Its pretty obvious they aren’t gong to have record profits every year.
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One last commment here.
All this stuff about how much people know when they borrow is really another version of “all credit is bad”. The argument is that all you should need to know to convince you not to use credit is that it will cost “A LOT” and it will take “A REALLY LONG TIME” for you to pay it off.
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“Why would banks hire people to do work that has absolutely nothing to do with loans and then lay them off when the loans went bad? Employers hire people to help them make money, whether its a bank or organized crime. You are making a patently silly argument.”
Are you deliberately misunderstand what I say or do you believe that a clerk that enters loan payment into the computer is somehow responsible for what you call “trapping” people? Or do you think that when IndyMac went out of business tellers haven’t lost their jobs, only mortgage representatives? Have you ever worked for any corporation?
Let me make it simple for you since you cannot seem to understand what is totally obvious to anybody who works for a publicly traded company. Every company has a lot of employees. Some employees do math calculations, maybe for loans, maybe for interest bank pays, some investment consultants. Then there are IT people who maintain their computer systems. Certainly some of these systems keep loan data, but I doubt it very much that a database administrator or an application programmer is responsible for writing up credit card rules. Or are you saying nobody shall work for the banks? When banks or any company is losing money or even earning less than expected, banks make cuts. When they cut people they figure out which people they can do without. Maybe they close a branch like Washington Mutual just did in my town. Do you seriously think that when banks’ isn’t showing enough profit to satisfy Wall Street they only lay off those who were directly responsible for their problems? What planet are you on?
Additionally, you keep saying how difficult it is to calculate how much time it’ll take you to pay off $X amount of money. What we are telling is that it isn’t really necessary. What any reasonable person with an ounce of common sense can see is that it is “a lot, several times more than what bank pays me on my deposit”. Do you think that those of us who do know math are actually sitting down and calculating it? We just look at the rate and say “WOW, this is a lot, I don’t want to pay that”. At least this was my thinking when I got my first card. I’d bet money that most of those who pay their balances in full thought along the same lines.
“At least Casino’s give people a chance to win.”
So do credit cards. They give you over a month interest-free period while your money is in the bank earning interest. If you pay it off during this period of time, you pay nothing to them. They give you fraud protection; AmEx doubles manufacturer’s warranty. They give you cash backs. There are people who do arbitrage and take advantage of 0% offers. And even though they charge currency conversion fees – although some larger banks and credit unions don’t – their exchange rate is still a whole lot better than what you get on your cash or traveller’s checks. They even provide you an opportunity to completely automate your payments by signing up for automatic payment of the full balance. This way you are never late, never pay interest.
They are a financial service. How you use it or even if you use it at all is entirely up to you.
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@kitty:”Are you confusing banks with credit card companies like Visa and Master Card? Visa and Master card don’t make money off interest; nor do they set interest rate or make policies. Banks that give you the cards do, and banks have not been showing profits lately, last time I checked. Visa and Master Card profits come from the merchants, and they earn money on every transaction on both credit and debit cards (used as credit).”
Exactly. People often confuse credit card companies with banks. Even supposedly informed economic articles I’ve read do so. Visa and Mastercard don’t directly care if you carry a balance or not. The banks who use their services do. All Visa cares about is if you use your credit card often, since they get a percentage of each transaction. You can hate credit cards and all they stand for, but at least be informed about who is making money for what! The credit card companies process transactions for the banks (and get paid quite a bit to do so). Their clients are exclusively banks and other financial institutions, NOT consumers.
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Their clients are exclusively banks and other financial institutions, NOT consumers.
Which makes them, as companies, mostly about as relevant to a discussion of consumer credit as mail-houses. They make money sending out credit card offers, but they have nothing to do with their clients business model. In many ways, neither do VISA/Mastercard. This discussion of people’s use of revolving loans is about the lenders’ business model, not companies that provide them with services.
Target and other retailers, on the other hand, have their own credit cards where I believe they are the lenders as well as processing the charges. Of course their business model was to help sell merchandise, although Target’s credit operation is now a major company profit center.
Are you deliberately misunderstand what I say or do you believe that a clerk that enters loan payment into the computer is somehow responsible for what you call “trapping” people?
I don’t think a clerk whose job depends on entering loan payments into a computer has “absolutely nothing” to do with the loan. They wouldn’t have a job in the first place if the loan weren’t made. Predatory lending is very profitable and will keep a lot of people employed. I don’t think that makes it socially constructive or benign.
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“Do you think that those of us who do know math are actually sitting down and calculating it? We just look at the rate and say “WOW, this is a lot, I don’t want to pay that”. At least this was my thinking when I got my first card. I’d bet money that most of those who pay their balances in full thought along the same lines.”
We agree entirely on that.
Gasoline costs “a lot” now too. People know it, they still buy it. Why? Because they need gas and the alternatives to buying it aren’t acceptable. But would the alternative sbe more acceptable if they knew that it was actually costing them $40 per gallon, instead of $4, when they put it on their charge card? I suspect they would, but they don’t understand they are paying that much. They think it may add a dollar to the price, at most. Still “a lot”, but not enough to give up driving and walk to work.
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“So yes, I did say they wouldn’t understand how you get 1.3 from 30%. And I stand by that statement. But it is also said it was almost completely irrelevant to the question of understanding the cost of credit. Because, in fact, being able to calculate “percentages”, which 1.3 is not, is not remotely the same as understanding compound interest or the cost of credit.”
But your comment was in response to this:
“I really don’t think it is hard to see that minimum payments are barely going to chip away at your debt.”
It says nothing about the exact long-term cost of credit being easy to calculate.
I’ll reiterate, you don’t need to know the *exact* long-term cost of borrowed money in order to know that paying the minimum is a bad idea. You can immediately see that most of your payment is going to interest and that your balance hardly goes down. Now you’re saying it’s “almost completely irrelevant” but I’m sure that in your own life you use estimation a whole lot more than exact calculation. Estimation is most definitely relevant.
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“By the time they “write off” loans, the credit card companies have often collected in interest and fees several times the amount the person borrowed. Yeh, they take a loss on their books when they write it off, but they made a profit on the loan.”
You’re still ignoring that a company’s value is determined not just by cash in the bank but by expected future revenue. Even if it’s still profitable, if it’s less profitable than expected that is very bad. GE recently lost 25% of its stock price because even though it profited by billions of dollars, it was a little below what was expected.
Furthermore, that expected value could be put up as collateral for loans, and that added leverage is going to multiply the cost of the write-down tremendously. There’s a good chance that even in the rare situation where a bank has already made a profit from a bad loan, the overall effect of a write-down on that loan will be very negative.
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For those who continue to maintain that we humans have complete free will, I just learned about a book called Nudge, which explores the research into “choice architecture”, or manufacturing situations which lead people to make certain decisions, both in their best interest and against. I haven’t read this, but I’m certain I know the conclusion: We are easily manipulated. Marketers (and others) can influence us to make choices that are not in our best interest.
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Jon -
“your comment was in response to this:
“I really don’t think it is hard to see that minimum payments are barely going to chip away at your debt.”
It says nothing about the exact long-term cost of credit being easy to calculate.”
I’m glad to see we agree, since that comment on minimum payment was a response to this:
“I don’t think calculating the future cost of borrowed money is a middle school math problem. I certainly can’t do it. I would have to go find the formulas and think about it for a long time and I would probably still get it wrong.
And I don’t think it is intuitively obvious that you will end up paying 10 or 20 times as much money as you borrow.”
So you agree with me?
There’s a good chance that even in the rare situation where a bank has already made a profit from a bad loan, the overall effect of a write-down on that loan will be very negative.
When any asset stops producing that is a negative thing for the company, but it eventually happens with most assets. Obviously they would rather the person kept paying. That doesn’t ,mean the loan was unprofitable. In the case of revolving credit, where they can collect 10-20 times the amount they initially loaned, there aren’t very many unprofitable loans written off. Their unprofitable loans are the ones people pay back.
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Estimation is most definitely relevant.
So if someone makes a payment of $25 per month on a $1000 loan it will take them a “long time to pay off the loan”, say approximately 40 months? That is a perfectly reasonable estimate based on 1000/25, not exact, just a ballpark figure. Of course it doesn’t take into account interest, so it will take a little longer than that.
Yeh, I think the predators understand very well that most of us will only do an estimate of the cost and not a very accurate one. In fact, they must count on it. Since, as you point out, anyone who made an accurate estimate would not borrow money on those terms.
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So if someone makes a payment of $25 per month on a $1000 loan it will take them a “long time to pay off the loan”, say approximately 40 months?
Read my comments again. The simple calculation used by Adam in comment 138 is the estimate we’re talking about, not this new method of yours.
I don’t know where you get this stuff from. You still don’t have a response except by changing the subject to either A) a more difficult computation (100% exact) or B) a worse estimate (completely ignoring interest). Why don’t you admit that Adam’s calculation is simple, yields a good understanding of the impact of minimum payments, and is in the reach of the vast majority of adults?
Since, as you point out, anyone who made an accurate estimate would not borrow money on those terms.
Your phrasing is wrong. When you spend $1000 on a credit card, it’s not a term of the loan that you will repay it using the minimum payment and no more. You can repay it much faster if you want.
Also, please point out where I said that. I don’t think I did. There are plenty of situations where it makes sense to use credit cards. I’m smart and I use credit cards. I even profit from them.
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The simple calculation used by Adam in comment 138 is the estimate we’re talking about
You mean the one you admit is irrelevant to the question I raised to begin with?
when you spend $1000 on a credit card, it’s not a term of the loan that you will repay it using the minimum payment
It is if that is all you can afford to pay and is, in fact, all you are paying on your current balance.
“Also, please point out where I said that.”
Right here:
“you don’t need to know the *exact* long-term cost of borrowed money in order to know that paying the minimum is a bad idea. You can immediately see that most of your payment is going to interest and that your balance hardly goes down.”
What you seem to be arguing is that no reasonable person would borrow money and make the minimum payment. Yet that is exactly what the credit card companies offer people. And many people accept that offer, indicating that they didn’t understand its implications.
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So you agree with me?
Yes and no.
I agree, as I have before, that calculating the exact cost of the credit is difficult and certainly not something taught in 5th grade. I disagree that it matters or is relevant.
Look again at the your comment and Adam’s comment. You talk about total cost. Adam talks about effect of minimum payments. You ignore that distinction from some reason.
The implication is that you think the only way to understand the minimum payment scheme is to be able to calculate the exact total cost of the loan. I disagree with that completely.
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You mean the one you admit is irrelevant to the question I raised to begin with?
It’s only irrelevant if you don’t understand what the calculation is.
It is if that is all you can afford to pay and is, in fact, all you are paying on your current balance.
Nope, it’s still not a term of the loan. It is a term of the loan that you will pay *at least* the minimum payment, otherwise you go into default.
What you seem to be arguing is that no reasonable person would borrow money and make the minimum payment.
Correct. However, irrelevant. I was asking you to point out where I said not to borrow money “on those terms.” Like I said, there is no term forcing you to make only the minimum payment.
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The implication is that you think the only way to understand the minimum payment scheme is to be able to calculate the exact total cost of the loan.
No. The only way to evaluate a purchase on credit is to know the cost of making that purchase. The minimum payment “scheme” is just one aspect of that cost. Do most people know that it will take “a long time” to pay off a loan with the minimum payment? Sure. But they don’t know how long that is or even have a clear idea of the implications for the total cost they are paying.
So what does a gallon of gas cost? A lot. How much more does it cost if you buy it on credit? A lot. Except one of those “a lot’s” means it costs almost $4 per gallon. The other one means it costs $80 per gallon. The difference between $4 and $80 is not insignificant even if they are both “a lot”.
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And just so that we have a real figure – if you borrow $1000 at 30% interest and pay it off at $25 dollars a month it will take you 30 years to pay off the loan and you will “only” have paid back a little over 9 times the amount you borrowed.
If you paid $30 per month, it would take 6 years and you would pay slightly over 2 times what you borrowed.
Does anyone think that difference is intuitively obvious or easily estimated? Of course, it is still a simplified version of actual credit purchase costs because the credit card companies lower the minimum payment as the balance declines. That means it will actually take longer and they will make more money than those figures indicate.
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Allow me to invert for effect.
So what does a gallon of gas cost? A lot. How much more does it cost if you buy it on credit? A lot. Except one of those “a lot’s” means it costs almost $4 per gallon. The other one means it costs $80 per gallon.
The only way it could cost $80 is if you’re doing minimum payments. BUT:
The minimum payment “scheme” is just one aspect of that cost.
And yet, every single time you are talking about buying on credit, you are assuming minimum payments.
If you want to widen this debate into “credit is bad” rather than “minimum payments are deceptive”, feel free. That is even easier for me to argue.
But they don’t know how long that is or even have a clear idea of the implications for the total cost they are paying.
Wrong. If they do the simple, intuitive calculation we’ve been talking about, then they can instantly see that out of their $25, $24 goes to interest and $1 goes to debt reduction. The implications of that are clear.
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Nope, it’s still not a term of the loan.
It may not be imposed by the bank, but it is still one of the terms under which the person borrows. And the credit card issuers understand that, without that low minimum payment, many people would realize that they can’t really afford to borrow.
“Like I said, there is no term”
Right. So what?
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Wrong. If they do the simple, intuitive calculation we’ve been talking about, then they can instantly see that out of their $25, $24 goes to interest and $1 goes to debt reduction
Can you explain that calculation? Excel seems to think $.08 is going to pay off the principal. Simple, intuitive and wrong. Yep, I think that’s mostly how people estimate the cost of credit.
And yet, every single time you are talking about buying on credit, you are assuming minimum payments.
No, I’m not. I am simply using the minimum as an example. The reality is far more complicated. In fact, its almost impossible for someone to know how much they are paying for gas if they buy it on credit and carry a balance.
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It may not be imposed by the bank, but it is still one of the terms under which the person borrows.
No, it’s still not “one of the terms”. There is NO term that requires you to pay only the minimum payment.
Right. So what?
Well, so I never said that. I think the terms offered by credit cards are fine. That’s why I use credit cards.
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I think the terms offered by credit cards are fine.
Which terms are those? The one that gives you a grace period? Oh no, that isn’t a term since you aren’t required to use it. Irrelevant semantical games. Whatever you call it, if a person can only afford to pay the minimum that is part of their calculation of the cost of credit. Its very easy to calculate the cost if you pay off the loan before the end of the grace period.
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Which terms are those? The one that gives you a grace period? Oh no, that isn’t a term since you aren’t required to use it. Irrelevant semantical games.
Of course it’s a term, but you have it backwards. The grace period is a requirement on the credit card company, not you. You’re being deliberately obtuse.
Again, in case you forgot the original point, there is no term requiring you to pay only the minimum payment. That’s not a semantical game, it’s a fact. I don’t know why you’re even arguing this.
Whatever you call it, if a person can only afford to pay the minimum that is part of their calculation of the cost of credit.
Think about what leads a person into the situation where they can only afford the minimum payment. Maybe what you’re upset about is the easy availability of credit, not the minimum payment calculation.
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Can you explain that calculation? Excel seems to think $.08 is going to pay off the principal. Simple, intuitive and wrong. Yep, I think that’s mostly how people estimate the cost of credit.
I wonder how you even performed the calculation since I didn’t any information except a $25 payment and $24 interest. It was a hypothetical result. If your result, with whatever numbers you used, is correct then it’s even more in my favor.
A $25 payment with $0.08 going to principal is quite obviously going to take a long time to pay off and quite obviously you’re going to pay a lot of interest. I don’t need to calculate the exact total cost of the loan to know that, and either does anybody else.
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i say this is the difference between people who have been through this process and those who haven’t…
ie – someone who is not overweight, or never has been, doesn’t understand how it is difficult to lose weight.
someone who has never been in debt, or has had good financial education, doesn’t understand how difficult it is to get yourself out of debt.
as someone who is in both camp a and b (ie i am both overweight and in debt), i don’t tend to listen to people who have not overcome one obstacle or the other.
this is why i love this blog – because it is human, and the author admits to error! i think the biggest problem with those that are pulling themselves out of a funky situation, is that they have to admit to error. and that is tough.
but where does the responsibility lie – with that guy over there or with me? ultimately with me – i am the only one that has control over my fate, and there is nothing i can do to make that other guy do anything differently. so, i have to look at what i can do in my situation to correct it. so everyone can blame this or blame that for their situations,but ultimately, the blame lies with numero uno.
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