Living on Credit – You’re Just Asking For Trouble

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Living on Credit: A Fine Line Between Debt and Debt Overload

Living on credit often means being either in debt or facing debt overload, also known as debt overhang. It’s important to distinguish between these two situations.

Debt: A Normal Situation for Most

Being in debt is a normal part of life for most people. Debt typically covers the sums we owe for goods and services we regularly use. Many of these expenses are related to our basic needs for food, clothing, and shelter. For example, the mortgage we take out to acquire property and the associated housing services—such as heating, electricity, communication services (e.g., cable and telephone), and insurance premiums (to protect our home from fire or theft). Additionally, debt may include money owed for food, clothing, a car, furniture, medications, dental care, and travel.

For many people, this type of debt situation isn’t a problem. As long as they can meet their financial obligations, there’s no need to worry. After all, who is truly 100% debt-free? Even wealthy individuals carry some form of debt—largely because a wealthier lifestyle involves higher expenses. The upper class typically spends more than the middle class.

Living on Credit Leads to Debt Overload

Have you ever wondered why financial planners are in such high demand these days? They not only help people plan for retirement but also provide budgeting assistance to those struggling to make ends meet. There are individuals who can’t repay their debts when they come due, simply because they can’t even make the minimum payments on their credit cards.

Debt overload is a financial nightmare. People who are constantly living on credit and are overstretched often find themselves stuck in a vicious cycle, unable to break free.

Debt overhang occurs when a person’s debt exceeds their capacity to pay it off, usually due to insufficient income. One sign of debt overhang is when people make only the minimum payments on their credit cards or frequently request increases in their credit limits.

Consider These Facts:

Over the last 10 years, Canadians’ incomes have increased by an average of 3% annually, meaning they have 3% more disposable income after taxes.
During the same period, Canadians’ debt has increased by an average of 6%, meaning they are borrowing more each year.
In 2000, Canada’s disposable personal income reached $631 billion, while consumer credit totaled $614 billion.
The number of credit cards in circulation—Mastercard and Visa—has increased by 7% each year, and the amounts Canadians owe have increased by 5% annually.
Unpaid balances on credit cards have risen by 15% per year. In 2001, there were 44 million Visa and Mastercard cards in use in Canada.

If there’s one thing that’s easy to do in North America, it’s living on credit. “No sweat.”

We know because we’ve experienced it firsthand. About three times a week, we receive loan offers from financial institutions and credit card companies. One letter even offered us a “no questions asked” loan of $25K at 1.2% interest for the first six months, then at 18% from month seven onward. What did we do with it? We threw it in the trash. At first, these offers may seem tempting, but the thought of paying that much interest in the long term quickly makes you cringe.

Some credit card companies even provide incentives to borrow, like our aunt, who was lured into borrowing $20,000 at an attractive rate, plus 10 department store gift certificates worth $100 each.

Why Live on Credit?

There are many reasons people live on credit:

To fulfill an insatiable desire for material goods.
To keep up with the Joneses.
To give in to their children’s spending habits (kids nowadays tend to gravitate toward the most expensive brands).
To consider shopping a form of therapy – they “treat” themselves to feel better.
To borrow easy money with generous terms—terms that make it hard to say no.
To be a frivolous consumer (modern society creates millions of artificial needs, convincing consumers that certain products are “must-haves”).

Take the last reason. What’s an example of an artificial need? Your cell phone comes with a case, right? But someone thought, “Why stop there?” They created plastic covers that fit over the phone’s keypad “to protect the keys.”

Your tissue box is another example. Today’s tissue boxes may feature beautiful designs, but someone still came up with fancy covers to “enhance” them. Who really needs a second layer? And how many gadgets do you have in your kitchen that you’ve only used once or twice?

Tips on How Not to Live on Credit

Eliminating credit from your life is possible, but if you’ve been a shopaholic for a while, it will take serious discipline. Here are some tips on how to break free from relying on plastic:

Throw out those credit card offers that land in your mailbox. You only need one or two cards, max.
Create a grocery list before heading to the supermarket. Shopping without a list often leads to overspending. Plan your meals for the week and build your shopping list around those meals. A related tip: buy ingredients you can use repeatedly. One time, we cooked a Lebanese dish that called for cumin—just a pinch. It sat untouched in our pantry for two years!
Avoid impulse buying by asking yourself three times: “Do I really need this?”
Don’t be fooled by department store sales: 30% off isn’t a great deal if you don’t actually need the item.
Pay off the credit cards with the highest interest rates first. Don’t use them again until the balance is fully paid off.
Stop trying to keep up with the Joneses. If they have a fancy GPS in their car, that doesn’t mean you need one too.
Save a fixed amount from each paycheck. Set up automatic deductions with your bank to make saving effortless.
Instead of leaving loose change around the house, gather it up and store it in an old jar. When it’s full, take it to the bank.
Buy generic products. Most supermarkets offer their own versions of everyday items like flour, sugar, soap, detergent, bread, etc.
Start paying cash for your daily expenses: gas, toiletries, dry cleaning, medication, cosmetics, and even lunch (it’s often cheaper to make your own meals!).
Reduce the frequency of dining out. According to a 2000 article in *Report on Business Magazine*, the average Canadian household spends $112 weekly on food, with more than a quarter of that spent in restaurants.
Rent a movie and pop your own popcorn instead of spending a small fortune at the theater!