Why Many Are in Debt

MICHAEL and Reena celebrated their first wedding anniversary by returning to the place of their honeymoon. But at the threshold of the second year of their marriage, they came face-to-face with an unpleasant reality. Regardless of how much they economized, they could not pay all their bills.

Consider another couple. Robert had only a small student loan to pay off when he married Rhonda, and she had only car payments. Robert says: “We both worked full-time, and between us we made $2,950 per month. But we weren’t getting anywhere.” Rhonda observes: “We hadn’t made any major purchases or done anything outlandish. I just couldn’t understand where our money was going.”

Robert and Rhonda were not lazy. Neither were Michael and Reena. What was their problem? Credit-card debts. Within the first year of marriage, Michael and Reena owed $14,000 on their credit cards. After two years of marriage, Robert and Rhonda’s debt on their cards totaled $6,000.

Anthony, a middle-aged family man, also faced the financial crisis of his life. His problems, though, were not related to credit cards. In 1993 the company he worked for downsized, and Anthony lost his managerial position that paid $48,000 a year. After that, providing for his family of four became a big challenge for him. Similarly, Janet, a single parent living in New York City, could barely make ends meet with her yearly income of about $11,000.

While it is true that most money problems can be alleviated with proper management, the fact is that we are living in an age when many are handicapped by walking “in the unprofitableness of their minds.” (Ephesians 4:17) Grace W. Weinstein, in her book The Lifetime Book of Money Management, observes: “Many of the rules of the financial game have changed, turned upside down by an unpredictable economy, new attitudes toward spending and saving, and changing life-styles.” In the topsy-turvy world in which we live, more and more people are finding it increasingly difficult to manage personal and family finances.

Happily, Michael and Reena, Robert and Rhonda, Anthony, and Janet have managed to get a handle on their finances. Before considering what helped them, let us take a closer look at the form of easy financing that has added to the monetary woes of many—yes, credit cards.

Credit Cards—Will They Serve You or Enslave You?

“THE moment each month when I open my credit-card statements is a low-comedy catastrophe,” observes an English teacher in the United States. “I stare at the balance in disbelief, as if some other personality of mine, some fiscal Mr. Hyde, had gone on a manic tear through toy stores, appliance stores, supermarkets and gas stations.”

Dolores too finds it easy to run up charges. She says: “Using credit cards is painless. I wouldn’t spend real money like that. But shopping with credit cards is different. You never see the money. All you do is give your card, and the card comes back to you.”

It is not surprising that credit-card debt in the United States in June 1995 totaled $195.2 billion—an average of over $1,000 for every cardholder! Yet, credit-card companies continue to woo new customers with such incentives as low introductory interest rates and no annual fees. How many credit-card solicitations have you received in recent months? The average U.S. household gets about 24 every year! A typical cardholder in the United States used ten credit cards in 1994 to charge 25 percent more than he did the year before.

In Japan, credit cards are more plentiful than telephones; there are an average of two cards for every Japanese over the age of 20. In the rest of Asia, over 120 million credit cards are issued, about 1 for every 12 inhabitants. James Cassin, of MasterCard International, says: “Asia is by far the fastest-growing area for credit card transactions.” President of Visa International, Edmund P. Jensen, predicts: “We’ll be a cardcentric society for a long time.”

Credit cards will evidently continue to dig deeper into the fabric of life. When used properly, they can be an asset. Misuse, however, can sting painfully. Having a basic knowledge of credit cards may help you use this financial device to your benefit.

Types of Cards

The most widely honored cards are bank cards such as Visa and MasterCard. These cards are issued by financial institutions and carry an annual fee, typically of $15 to $25 a year. At times, this fee is waived, depending on the customer’s credit history and his use of the card. Payment can be made in full each month, generally without any interest charges, or the payments can be made in monthly installments that include high interest charges. A spending limit is stipulated, based on the applicant’s credit history. The limit is often raised as the ability to pay is demonstrated.

Bank cards also have provisions for securing cash advances using automatic teller machines or checks provided by the issuer. Obtaining cash this way, however, is costly. One is generally charged between $2 and $5 for every $100 borrowed. And interest on such cash advances is accrued from the day money is drawn.

Besides banks, many stores and national store chains issue credit cards that are honored at their own establishments. There is usually no annual fee with such cards. However, if the amount due is not paid in full, the interest may be higher than that on bank cards.

Oil companies also issue credit cards that have no annual fees. These cards are generally good only at the companies’ own service stations and sometimes at certain hotels. Like the cards issued by stores, they allow for payment in full without interest or payment over a period of time with interest.

There are also travel and entertainment cards, such as Diners Club and American Express. This type of card has an annual fee but no interest charge, since the full payment is due upon receipt of the monthly bill. The lines are blurred, however, between these cards and bank cards. American Express, for example, also offers the Optima card, which has interest charges and is similar to a bank card.

A different kind of card entering the U.S. market is the smart card, called such because of a memory chip embedded in it. It can be used as a cash card, since the user can have the chip programmed for a designated amount of money. The price of a purchase can be deducted from this by a participating vendor. By last year the French were already using 23 million smart cards and the Japanese 11 million. It has been predicted that the number of such cards worldwide will skyrocket to more than a billion by the year 2000.

Before obtaining a card, a person would be wise to give attention to the terms of credit. “Key credit terms to consider,” according to a brochure published by the Federal Reserve System of the U.S. Government, are “annual percentage rate (APR), annual fee, and grace period.” Among other factors to consider are cash-advance and over-the-limit fees as well as late-payment charges.

Finance Charges—How Steep?

The finance charges that people are subject to when they do not pay their monthly balances in full can be far steeper than most realize. For example, consider the APR, which is a measure of the true cost of credit. The relation of the annual interest rate to the APR can be illustrated this way. Let us say that you lend $100 to a friend and he repays you $108 at the end of the year. In such a case, your friend is paying you 8-percent annual interest. Yet, suppose he repays that $100 loan in 12 monthly installments of $9 each. The total at the end of the year is still $108, but you, the lender, have had the use of the money as the payments were made each month. The APR on such a loan works out to be 14.5 percent!

According to a survey taken by the U.S. Federal Reserve System last year, the APRs on bank credit cards start at 9.94 percent and go up to 19.80 percent, with between 17 and 19 percent being typical. While some institutions do offer lower introductory rates, typically 5.9 percent, they could increase once the introductory period is over. The rates are also raised if the issuer detects a rise in risk. Some issuers penalize late payers by increasing their interest rate. A penalty is also applied for exceeding the spending limit.

In Asian countries, annual percentage rates on cards can be very high. Some bank cards, for example, charge 24 percent in Hong Kong, 30 percent in India, 36 percent in Indonesia, 45 percent in the Philippines, 24 percent in Singapore, and 20 percent in Taiwan.

Clearly, credit cards provide easy but very expensive credit. Going into a store and running up credit-card charges that you can pay only in installments is like walking into a bank and borrowing money at an exorbitant rate. Yet, almost 3 out of 4 cardholders in the United States do exactly that! They carry an outstanding balance on which they pay high interest. In the United States, the average monthly balance on both Visa and MasterCard last year was $1,825, and many people carry debts of that amount on a number of credit cards.

A Trap That Can Enslave You

Ruth Susswein, executive director of the Bank Cardholders of America, says that card users don’t realize the financial troubles they can get into. She points out that a card user making the minimum payment—$36 a month—on an $1,825 credit-card balance would take more than 22 years to pay off the debt.a Because of the added interest payments, in that time the consumer would pay about $10,000 for the $1,825 debt! And that is if he never charged anything else on this card! So, if you have a tendency to overspend, credit cards in your wallet can become a trap.

How do people come to be trapped? Robert, mentioned in the opening article, says: “We bought things we didn’t need. We joined a health club that we never used. We bought a mobile home, and we spent thousands of dollars fixing it without considering if it was worth it. We never really considered the consequences of our debts.”

Reena, also mentioned in the preceding article, explains what happened to her and her husband, Michael: “We just fell into debt. After marriage we bought everything we needed, using credit cards. For health-insurance premiums and purchases for which we could not use the cards, we exercised the cash-advance option on our credit cards. Within a year our debt reached $14,000. Realizing that most of our monthly credit-card payments were going toward interest was an eye-opener.”

Should You Have Cards?

After considering the financial quagmire into which credit cards have sunk millions of people, some may answer no. Daphne, aged 32, says: “My parents never had a credit card, and they do not want one.” Actually, 1 out of 4 U.S. cardholders uses his credit cards wisely. He gets the benefits without suffering the pain of paying sky-high interest charges. Maria is one such person. “I like the convenience,” she says. “I don’t have to carry a lot of cash with me. If I see something on sale that I need, I’m able to get it.”

Maria continues: “I always make sure that I have enough funds to cover the purchase. I’ve never exercised the cash-advance option. And I’ve never paid any finance charges.” It is convenient to use a credit card when making a guaranteed hotel reservation, and in the United States, a credit card is a necessity when renting a car.

Some people, however, are more impulsive when it comes to shopping. They may be able to make buying a more conscious act by spending mainly cash. Michael and Reena did not want to make being in debt a way of life. So they decided not to use any cards for five years—except in an emergency.

Whether you choose to use credit cards is a personal decision. But if you do, use them carefully. Use them as a tool of convenience. And by all means avoid accumulating debts. Keeping credit-card spending under control is an important step in managing your finances successfully. Consider what more you can do.

The Way to Stay Out of Debt

IN THESE changing times, managing family resources can be a challenge. How can you meet the challenge successfully?

The answer is not necessarily more income. Financial experts say that the answer has to do with having a sense of where the money is coming from and where it is going as well as with being willing to make informed decisions. To do this, you need a budget.

Overcoming Resistance to a Budget

Budgets, however, “conjure up all sorts of images of dreariness,” says financial adviser, Grace Weinstein. So, many people simply will not make one. Some also associate the need for a budget with a low income or a lack of education. But even professionals with high incomes have money problems. A financial counselor says: “One of my first clients made $187,000 a year . . . Their credit card debt alone was just under $95,000.”

Michael, mentioned previously, was reluctant to seek financial advice for another reason. He admits: “I was afraid that others would view me as naive and foolish.” But such fear is unfounded. Managing money and making money call for different skills, and most people are not trained to manage money. A social worker points out: “We graduate from high school knowing more about an isosceles triangle than how to save money.”

Budgeting, though, is relatively easy to learn. It involves making a list of income and a list of expenses—and then keeping the expenses within the income. Actually, making up a budget can be enjoyable, and living by it can be satisfying.

Getting Started

Let us start by making a list of income. For most of us, this should be easy because it generally involves only a few items—salary, interest from a savings account, and so forth.

But do not count on income that is uncertain, such as that from overtime pay, bonuses, or gifts. Financial consultants warn that planning on uncertain sources of income can get you into debt. If such revenues do materialize, you may choose to use the money to treat yourself and the family, to help others in need, or to contribute to a worthy cause.

Making a list of expenses, however, can be a bit more tricky. Robert and Rhonda, mentioned in the previous articles, could not understand where their hard-earned money was going. Robert explains how they solved the problem: “For one month we each carried a piece of paper and wrote down every single penny we spent. We even wrote down the money spent on a cup of coffee. And at the end of each day, we entered the amounts in the budget book I had purchased.”

Conscientiously recording everything you spend will help you locate any ‘mystery money’ that seems to slip away. If you know your spending habits, however, you may decide to bypass keeping a detailed itemization of what you spend each day and go ahead with a list of monthly expenditures.

Listing Monthly Expenses

You may want to work up a chart similar to the one shown above. In the “Actual Spending” column, enter the amount you currently spend for each item. Limit the number of main categories, using headings such as “food,” “housing,” and “clothing.” However, do not omit pertinent subcategories. For Robert and Rhonda, a large part of their money was going toward eating out, so separating “eating out” from “groceries” proved helpful. If you enjoy extending hospitality to others, this too can be a subcategory under “food.” The idea is to make the chart reflect your individuality and preferences.

When working up your chart, do not forget quarterly, semiannual, annual, and other periodic expenses, such as payments for insurance and taxes. To include them in the monthly chart, though, you will have to divide the amount by the appropriate number of months.

An important item in a list of expenses is “savings.” While many may not think of savings as an expense, you will wisely budget some of your monthly income for emergencies or special purposes. Grace Weinstein emphasizes the importance of including savings in your list of expenses: “If you can’t manage to save at least 5 percent of your after-tax income (and that’s a bare minimum), you’ll have to take harsher measures. Cut out your use of credit, rearrange your style of living, and get down to basics.” Yes, make a point to include savings in your monthly budget.

For a cushion during a period of possible unemployment, it is now commonly recommended that you try to establish readily available savings of at least six months’ earnings. “If you get a raise,” says a fiscal adviser, “save half of it.” Do you feel that it is impossible for you to save?

Consider Laxmi Bai, who like many in rural India is very poor. She started to put away in an earthen pot a handful of rice from the daily portion she cooked for her family. Periodically, she would sell the rice and deposit the money in the bank. This was a step toward getting a bank loan to help her son set up a bicycle-repair shop. Such small savings have made big differences in the lives of many, reports India Today. This has made economic independence a reality for some.

However, balancing a budget is more than making a list of income and expenses. It involves keeping expenses within income, which may call for cutting back on your spending.

Is It Essential?

Notice the heading “Essential?” on the form on page 9. This column is vital to consider, especially if you find that the total in the “Amount Budgeted” column is greater than your income. However, deciding whether an item is essential and how much money to allow for it can be a challenge. Especially is this so in these changing times when we are bombarded with a continual supply of new products that are advertised as needs. Thinking of each expense in terms of definite need, questionable need, or nice-to-have luxury will help.

Look at each expense that you have listed, and after thoughtful evaluation, enter “Y” in your “Essential?” column if the item is a definite essential; “?” if it is a questionable need; and “N” if it is a nice-to-have luxury. Remember, the total listed in the “Amount Budgeted” column cannot be greater than your monthly income!

The items marked “?” and “N” would obviously be the ones to begin cutting. These expenses may not need to be completely eliminated. The idea is to examine each item to see if the expense is worth the enjoyment that the expense brings and to slash accordingly. Robert and Rhonda saw from their list that they were spending $500 a month on eating out. It was a habit they had fallen into because neither of them knew how to cook. But Rhonda took steps to learn and says: “Now cooking has become enjoyable, and we eat at home more often.” Robert adds: “We now eat out only on special occasions or when it is necessary.”

A change in your circumstances may cause you to make a total reevaluation of what is essential. As mentioned in the first article, Anthony’s income took a nosedive. It went from $48,000 annually to less than $20,000 and stayed at that level for two years. If this should happen to you, you may need to set up a survival budget, paring all fat from your spending.

Anthony did just that. By making serious cuts in money spent on food, clothing, transportation, and recreation, he painfully managed to keep from losing his house.a “As a family we had to determine our real needs and wants,” he says, “and we have benefited from the experience. We now know how to be content with less.”

Cut Back on Debt

Unchecked debt can frustrate your efforts to live within your means. While long-term debt used for financing the purchase of assets such as a home that increases in value can be advantageous, credit-card debts used to finance day-to-day living can prove disastrous. So “don’t pay a penny in card charges,” says Newsweek.

Financial experts encourage paying off credit-card debts even if you have to dip into your savings. It simply does not make sense to carry debts at high interest rates while nurturing savings at low interest rates. Realizing this, Michael and Reena paid off their credit-card debts by cashing in their savings bonds, and they resolved not to get into that situation again.

Robert and Rhonda, not having such resources, went to a survival budget. Robert says: “I made a bar graph on a white board showing how our debt would be decreasing month by month and hung the board in our bedroom where we could see it every morning. This provided a daily incentive.” At the end of the year, how delighted they were to be free of their $6,000 credit-card debt!

In some countries even a mortgage is not as good an investment as it once was. And buying a home can end up costing you plenty in terms of interest charges. What can you do to reduce the cost of a mortgage? “Either put more money down than the bank requires or buy a less expensive house,” recommends Newsweek. “If you already own a house, resist the urge to scale up.”

You can substantially reduce the cost of an auto loan by making a large down payment. But you will have to save for this ahead of time by making an entry for it in your family budget. And how about selecting a good previously owned vehicle?b Its low initial cost may mean lower finance charges. You may even be able to purchase one without having to go into debt for it.

Will You Succeed?

Whether you succeed in making your budget work depends to a large extent on how realistic it is. “The system won’t operate if the amount set aside for the household is so small you can’t possibly get through the month on it,” says one couple who have successfully lived by a budget.

Another very important factor in making a budget work is good communication among family members. Those affected by the budget should have an opportunity to express their viewpoints and feelings without being ridiculed. If family members involved understand the needs and wants of one another and realize what the family’s financial situation really is, there will likely be better cooperation and a better chance that the family budget will succeed.

In these critical times, as the scene of the world keeps changing, pressure on family finances increases. (2 Timothy 3:1; 1 Corinthians 7:31) We need to exercise “practical wisdom” in coping with the challenges of modern life. (Proverbs 2:7) Keeping a budget may be just the thing to help you do that.