Living on credit means either being in debt or being on debt overload, also known as debt overhang. A distinction between these two is important.
Being in debt is a normal situation for us mortals. Being in debt covers those sums of money we owe for goods and services that we receive regularly. Most of them are related to our three basic needs for food, clothing and shelter: the mortgage we obtained to acquire property and the services that are pertinent to housing; for example, heating, electricity, communications services such as cable and telephone and insurance premiums (to purchase protection for our dwelling against fire or theft). It also covers monies owed for food and clothing, a car, furniture for the house, medicines, dental appointments and travel.
For many people, this type of debt situation is not a problem. For as long as they are able to meet their financial obligations, there is no reason to worry. Besides, who is really debt-free 100%? Even wealthy individuals have debt. That’s because a wealthy lifestyle entails more expenses. Upper class families have to spend more than middle class families.
Living on Credit Leads to Debt Overload
Do you know why financial planners are in demand these days? Not only do they help people plan their retirement but they also provide budgeting assistance to those who can no longer make ends meet. There are people who can’t repay their debts when they fall due because they can’t even make the minimum payments on their credit cards.
Debt overload is a nightmare. People who are constantly living on credit and are overstretched are having significant problems trying to “unstuck” themselves from this vicious circle of credit.
Debt overhang is a situation where a person’s debt exceeds his capacity to pay it back, given that his income is insufficient. One manifestation of debt overhang is when people make only the minimum payments on credit cards or they frequently request an increase in their line of credit.
Consider these facts:
- In the last 10 years, Canadians’ incomes have increased by an average 3% annually; this means that Canadians have 3% more cash in their pockets after paying taxes;
- During the same period, Canadians have incurred 6% more debt on average; this means they borrow 6% more;
- In 2000, disposable personal income in Canada reached $631 billion dollars while consumer credit totaled $614 billion;
- The number of credit cards in circulation – Mastercard and Visa – has increased by 7% each year; the amounts that Canadians have to pay back have increased by 5% on the average each year;
- Unpaid balances on credit cards increased by 15% each year. Note that in 2001, there were 44 million Visas and Mastercards in use.
If there’s one thing that can be said of North America, living on credit is one of the easiest things to do. “No sweat.”
We know, because we’ve experienced it first hand. About three times a week, we receive loan offers in the mail coming from financial institutions and credit card companies. We got one letter that offered us a “no questions asked” loan of $25K at 1.2% interest for the first six months and then at 18% in month 7 and onwards. What did we do with it? We threw it into the waste basket. At first these offers look tempting, but you cringe when you start calculating the amount of interest you’ll be paying in the long term.
Some of these credit card companies will even give you the proper incentives to borrow from them. Our aunt, for example, was lured into borrowing $20,000 at a very attractive rate and with a bonus of 10 department store gift certificates at $100.00 each.
Why Live on Credit?
There are many reasons why 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 have a propensity for buying only the most expensive brand names)
- to consider shopping as therapy – they “treat” themselves so they can feel better about themselves
- to borrow easy money at generous terms – so generous that people find it difficult to say NO!
- to be a frivolous consumer (modern society has created millions of artificial needs convincing consumers that certain products are a “must have.”)
Take the last reason. What’s a good example of an artificial need? Your cell phone comes with a case when you buy it. An entrepreneurial genius however thought that the case wasn’t enough. He created plastic cases – those things that you fit over the phone’s keypad to “protect the keys.”
Your tissue box is another example. Today’s tissue boxes have great designs on them, but no, someone had to come up with fancy cases for them. Who needs double casing anyway? And take a look around your kitchen. How many gadgets are in your cupboards that you end up using only once or twice?
Tips on How Not to Live on Credit
Eliminating credit is possible, but if you’ve been a shopaholic for a long time, it will take truckloads of military-like discipline to stop your frivolous spending. We’ll provide some tips on how you can wean yourself away from plastic:
- throw those credit cards that land in your mailbox. You don’t need more than two;
- prepare a grocery list before heading for the supermarket. You tend to buy more without a list. Create a meal plan for the week ahead and then create your grocery list based on that meal plan. A related tip: buy only those ingredients that you can use over and over again. One time we cooked a Lebanese dish that required the spice cumin. We used a pinch of it and it remained untouched for the next 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 is not a great deal, especially if you don’t need the item in the first place!
- pay off your credit cards with the highest interest rates. Do not use them again until you’ve paid off the entire balance due;
- stop imitating the Joneses. If they have a fancy GPS in their car, you can do without it;
- save a fixed amount from your salary every two weeks. This can be done consistently if you arrange with your bank to automatically deduct this from your paycheck;
- instead of leaving loose change around your house, gather them up and put them into a piggy bank. Now, don’t go running to the store to buy a piggy bank. You can use an old cookie jar to store all your loose change. When it’s full, take it to the bank;
- buy generic. Most supermarkets have their own products – flour, sugar, soap and detergent, jam, bread, bottled water, soda, baking products, spices, etc.
- develop the habit of paying cash for your day-to-day purchases: gas, toiletries, dry cleaners, medication, cosmetics, lunch and dinner (it’s better to make a home cooked meal actually);
- reduce the frequency of dining out (in an article entitled “Why we Buy” published in Report on Business Magazine in January 2000, the writer said that “the average Canadian household spends $112 weekly on food, and more than a quarter of that is spent in restaurants”)
- rent a movie and pop your own corn instead of going to the movie house and buying a ridiculously-priced bag of popcorn!
Living on credit? Don’t be just any other consumer. Be an enlightened consumer and start paying cash!