March/April 2003

Debt - our precarious way of life

by J. Raymond Albrektson

Human slavery in the United States was officially abolished more than a century ago, but voluntary slavery is more popular than ever. The shackles are unobtrusive, and fit neatly in the wallet in the form of slim rectangles of gaudy plastic.

Americans are in love with credit cards -- to the extent that the average American has more than $8,500 in credit card debt. That works out to $34,000 for a family of four. The Federal Reserve recently reported that the national tab for consumer credit rose at a near-record rate of $7.8 billion dollars per month to a staggering total of $1.71 trillion dollars per month.

How is it that freedom-loving, red-blooded Americans have been so thoroughly seduced by the lure of buy-now, pay later? Why have those born in "the land of the free" voluntarily accepted the slavery of chronic indebtedness? A brief look at the history of consumer credit will lend insight into the problem as well as some clues on where this trend is taking us.

Drive Now, Pay Later

Consumer lending was kicked off by a group of automobile companies in 1916. The popularity of Henry Ford's Tin-Lizzie (the Model-T, introduced in 1908) made it difficult to sell automobiles that were priced two or three times as much as the Model-T.

The manufacturers of larger, more luxurious cars responded to Ford's challenge by introducing the concept of installment purchase. Instead of coughing up an up-front price of $300 for a Model-T, consumers found it attractive to pay a much higher price in "low monthly installments."

Soon the principle was extended to other durable goods, and many department stores and oil companies began to offer their own credit cards. In the economic boom that followed World War II, these cards became extremely popular. In fact, many returning GI's set up housekeeping with refrigerators and washing machines purchased on consumer credit using these store-brand credit cards.

The first universal credit card wasn't introduced until 1950 by the Diner's Club, Inc., chiefly as a billing convenience for corporate business expenses. When California's Bank of America launched the Visa card on a national basis in 1976, the modern age had truly arrived. Within a decade, credit cards had become a universal means of buying first and paying later.

Now we use modern credit cards to pay for everything from our children's college tuition to our own taxes. The result is a financial bonanza for the credit card companies, and a tidal wave of disaster for the blithe consumer who "charges" on, unaware of the real cost of today's credit catastrophe.

The Real Cost of Credit

One reason why we have allowed these plastic cuffs to be slipped without complaint over our wrists is because we don't immediately see the true cost of buying on credit. It's much like paying our taxes. We would have a taxpayer revolt overnight if, instead of having our taxes invisibly withheld by our employers, every taxpayer were

required to come up with the annual contribution to Uncle Sam in hard cash every April 15th. The true cost of credit remains, for most consumers, a matter of blissful ignorance.

Of course, credit card companies don't make it easy to understand the true cost of borrowing. Every credit card is accompanied by slim pamphlets with incredibly tiny print, containing the financial disclosure information required by law. Most of us, sadly, throw them away unread. Even if read, most consumers haven't begun to appreciate the enormous penalty we pay by opting to borrow first instead of saving first.

Let's imagine that Justin, a college sophomore, bought a Sony Playstation for $400 and charged it on one of his three credit cards. Let's further imagine that Justin forgot all about that credit card until he graduated, so that 36 months after the purchase a statement from the credit card company finally catches up to him (or his parents). At the 18.3 percent that represents the average credit card interest rate, his debt has now multiplied to $690. If we throw in penalties for failing to pay monthly minimums, Justin's little oversight could easily have ballooned to the value of a used car.

Justin's hypothetical problem illustrates an all too human way of dealing with debt -- attempted amnesia. We just want it to go away, and not thinking about our financial problems is a common approach. Why is it so easy to overlook credit card debt?

Most of us would prefer to take an ostrich approach to our debt rather than explore (and admit) the true financial cost of using debt to live beyond our means. But the dollars-and-cents cost is only one of the costs of our national habit of voluntary slavery. There are worse prices to pay.

Freedom = Save Now, Buy Later

One of the great tragedies of human slavery is that most slaves eventually grow accustomed to their bondage. They come to think of it as normal, and have a stunted understanding of such concepts as freedom and liberty.

Because borrowing has become such an enormously successful way of paying for every aspect of the modern appearance-driven lifestyle, most consumers aren't even aware that there is an alternative to "buy now, pay later." They have lost all understanding of what it means to be financially "free."

The alternative to buy now, pay later is simply this: save now, buy later. The financial advantages of saving versus borrowing are gigantic. Imagine that you could invest money at the same rate (18.3 percent) that credit card companies insist that you pay it back. If you invested only $100 per month for five years, your nest egg would be worth a whopping $9,700. On the other hand, if you needed a loan and could only afford a payment of $100 per month for five years at 18.3 percent interest, you could only get a loan for $3,913.

Of course, you probably can't put your money to work at 18.3 percent interest rates -- but credit card companies do that and more daily. It's easy to see why they will move heaven and earth to lend you money, even offering you premiums (i.e., airline miles, rebates, sweepstakes) and filling your mailbox with unrelenting "You have been Pre-Approved!" offers.

The credit card companies understand the value of putting their assets (money) to work by lending it to hapless consumers. You can steal a leaf from their notebook by putting your money to work -- by saving or investing first and then making a wise decision on how to spend it.

Building Character -- Not Debt

Putting this strategy into effect means saying "no" to every form of impulse buying. This is difficult, and most of us get little help from our society in encouraging the philosophy of "live within your means." I have never yet seen a billboard urging me to "Visit Hawaii -- When You Can Afford It." Have you ever visited a car dealership and had the salesman suggest, as you drooled over the latest high-performance precision driving machine, "What can I do to put you in this beauty -- three or four years from now?"

Our consumer-driven economy is built on the notion that each of us has an almost patriotic duty to play the role of the ideal consumer. This is defined as someone who spends everything he or she has, and then borrows as much as possible in order to buy whatever is currently being most aggressively marketed.

Why do we find it so easy to slide into a debt-driven lifestyle? I'm convinced that many of us have lost sight of what life is all about, and have somehow latched on to that tired old slogan from the 80s to the effect that "the one who dies with the most toys, wins." Whether it be Prada handbags, BMW cars or homes in the most fashionable neighborhoods, we somehow assume that the mere possession of fashionable assets confers status -- status that we deeply crave.

In reality, there is no limit to the lust for possessions, and the status gained for a few brief moments is a sorry and temporary substitute for the loss of a real and lasting asset -- one's character. A lifestyle financed by debt is not something to be admired, but rather to be pitied. A strong character, one able to evaluate choices objectively and to do that which is wise or right, is a possession of lasting and significant value.

Developing one's character -- that inner strength of will that does the right thing despite temptations to do otherwise -- is not a major emphasis in our modern culture. Building a great physique -- now that's popular! Building one's character? Forget it! In fact, building character works a lot like body building. Muscles must first be identified and then developed. One of the chief muscular components of character is the ability to defer gratification. This means being able to say "no" to a present pleasure in order to secure a greater good at a later time.

The notion of deferred gratification is completely opposed to the contemporary philosophy of consumerism. The voices of the credit-hucksters keep on chanting the same mantra: "Buy now! No need to wait! Easy credit terms!"

The Railroad to Financial Freedom

During the Civil War, slaves escaping to freedom were passed along a network known as the Underground Railway. Today's weary consumer, tired of wearing the shackles of the debt-slave, can ride that railway to the three stations representing the road to real financial liberty.

· The first station on the Underground Debt Railroad is to embrace deferred gratification. The bottom line: Move from the buy now, pay later way of life to the philosophy of save now, buy later. Make this an invariable rule of life and you will have taken the first (and hardest) step towards breathing the fresh, clear air of financial freedom.

Simply making this decision is not enough. You are surrounded by debt-enablers; both the plastic and the human kind. You need to say "no" to your credit cards. Thirty minutes on a cookie sheet in a pre-heated oven (350°) has a devastating effect on credit cards. To your friends who urge you, either in words or actions, to spend what you don't have, you need to learn these simple words, "No, thanks."

· The second stage on the Underground Debt Railroad is to eliminate your present debt. This won't be easy, especially as the most typical solution you will be offered is to pay off your debts -- with borrowed money! Homeowners are particularly vulnerable to this pitch. It's all too easy for them to cash out their equity for depreciating assets. The reality is that often consumers exchange unsecured credit card debt for the kind of debt that can cost them their one real asset -- their house.

A better approach is to attack credit card debt systematically. Identify all of your debt-laden credit cards. Even if you only have one credit card with ongoing finance charges, try this simple strategy for debt reduction.

Find an ugly, scratchy, old piece of rope, the funkier the better.

A length of rusty iron chain is actually superior, because it more vividly symbolizes the slavery of indebtedness, but would tend to set off metal detectors. Now tie a hunk of that nasty rope around your ankle. Tie additional lengths of rope until you have as many revolting ankle bracelets as you have overdue credit card balances. Finally, cut each rope off your ankle only when you've paid off a credit card.

Sound extreme? If you had to wear ropes around your ankle -- in the shower, at work, at the gym, and even in bed -- you'd quickly learn to hate debt. And that's the idea: to de-normalize debt. Even if you can't stand the idea of wearing symbolic slave shackles, find some dramatic way to remind yourself of your goal to get out of debt and stay free.

· The third and last step on the railroad to financial freedom is to build a savings cushion. Why do so many people take that first step into credit card debt? One can't always point the finger at foolish luxuries. Consider these scenarios: The transmission in the van fell out, and it had to be fixed now -- for $1,200. The youngest child broke his arm roller-blading, and the emergency room accepted plastic. You get the idea.

What most consumers badly need to meet these ordinary financial emergencies is a cushion. A financial cushion is just an easily accessible savings or investment account containing the equivalent of a few months' income. Instead of reaching for the credit card when the inevitable financial disasters arise, dip into your cushion. The idea is simple: you're saving first for the unknown expenses that will inevitably come your way. When they arrive, you'll be ready. If they don't, you still have the money. Talk about a win-win situation!

Getting out of debt is hard, and staying out of debt is harder.

We need all the help we can get to master the skills of living contentedly on the assets that God has provided.

Recognize What God Has Given You

One of the most serious problems with a debt-based lifestyle was summarized in an internet discussion group with these words: "Spending money you haven't earned yet is like using up years you haven't lived yet." God has given all of us many things: life, food, shelter -- everything we need for life. When we go into debt to buy that which God hasn't yet given us, we are spending from a future that we may never see.

This gives us one of the most useful keys to learning the secret of contentment: recognizing God's gifts in our lives. For example, suppose that I loved expensive fountain pens and had assembled a large collection of them. Suppose also that I greatly admired the music of Bruce Springsteen. Now imagine that I found myself sitting next to him on an airplane and, in the course of our conversation, he gave me his half-used Bic pen. Even though it would certainly be the least expensive pen in my collection, I would probably treasure it because "it was a gift from the Boss."

As it happens, all of the wealth in our lives (including houses, cars, financial assets, loved ones and Bic pens) was given to us by God himself. Isn't there something glaringly wrong with despising the things that God has given us and yearning instead for things that he hasn't yet given -- and may never give?

God has given us far more than is readily apparent by surveying our net-worth statements. Objects of financial value pale into insignificance when compared with the true wealth that God has made available to those who become a part of his family. These assets, while intangible, are nevertheless quite real. They include such resources as the forgiveness of sins through what Christ did for us on the cross, a renewed relationship with our heavenly Father and the promise of a bodily resurrection. Those who have put their faith in Christ have become recipients of his wealth -- true wealth, riches that are safely stored where neither thieves, tax collectors nor the repo-man can get at them.

If there is one holiday that symbolizes our God-given freedom, it is certainly Independence Day. Why not make that the target date for striking off the last of your plastic shackles? As the fireworks fly, the hot-dogs sizzle and the circling sunlight warmly beams down, you could add a new tradition to the Glorious Fourth: The annual repudiation of consumer debt and celebration of financial freedom. May that star-spangled banner truly wave over "the Land of the Free." 

1 See http://www.vnunet.com/News/1124210

2 Statistics available at http://www.cbsnews.com/stories/2002/06/25/earlyshow/contributors/raymartin Debt Counseling: The Good, Bad & Ugly, CBS

NEWS.com, June 26, 2002

3 Source: MotherJones.com (http://motherjones.com/magazine/MA02/creditcards.html)

Get Out of Debt­By Begging? Some people adopt novel strategies for getting out of debt. A young woman with $20,000 of credit card debt opened a web site (http://www.SaveKaryn.com) with this plea: "If you have an extra buck or two, please send it my way!" The reaction from the web-surfing public hasn't always been positive. Karyn's efforts spawned at least one parody site (http://www.DontSaveKaryn.com) created by a pair of computer programmers named Bob and Ben. Their response: "Don't save Karyn! We too are internet panhandlers. Please help us waste your money. We are niceno money will be used to help homeless people or starving people in Africa" 1

Debt Counseling­ Beware! Late-night TV viewers are bombarded with ads for kitchen gadgets, psychic hotlines and debt counselors. Most debt counselors advise consolidating all the debtor's loans and allowing the debtor to make one monthly payment. Many advertise that they can negotiate a lower interest rate than the consumer, but consumers should be very careful when contracting with debt counselors. Some make their money by charging the consumer a significant one-time fee, and possibly even an ongoing monthly fee.2

Credit Cards on Campus Every September college students run the gauntlet of credit card hucksters when they return to campus, and the colleges themselves are willing participants in the task of hooking students on easy-credit. Credit card companies give millions every year to universities to put credit card applications into the hands of clueless undergraduates. Brigham Young University was paid an estimated $70,000 last year just for putting applications into the shopping bags at the University bookstore.3 According to an April report on undergraduate credit card use conducted by Nellie Mae, eight out of ten undergraduates have at least one credit card, up 24 percent since 1998. Of those undergraduates who have credit cards, more than a fifth (21 percent) have high-level balances. Graduating students have an average of $20,402 in combined education loan and credit card balances.

Saving vs. Borrowing Is it really worthwhile to save first for high-dollar expenses such as automobiles? Ethan Pope demonstrated in How to Be a Smart Money Manager (Thomas Nelson, 1995) that it amounts to "Buy four, get the fifth one free." In other words, the money saved by accumulating cash prior to purchase and avoiding auto loans for four cars would pay for the cost of a fifth car.

Further Reading These books are available through your local Christian bookstore:   Living Large -- how to live well, even on a little. Discover how to give, save and invest according to biblical principles -- and how to put your financial house in order. By J. Raymond Albrektson.   Money-Savvy Kids -- Parenting Penny-Wise Kids in a Money-Hungry World. Provides a strategy you can use to teach your child to give generously, save wisely and spend carefully. By J. Raymond Albrektson.   'Til Debt Do Us Part -- Answers and Healing for Money Conflicts in Your Marriage. How to get off the emotional roller coaster of out-of-control finances. By Julie Ann Barnhill.

Available FREE from Plain Truth Ministries: Facing Your Financial Problems (item K154). Getting your financial priorities in order. By Greg Albrecht.

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