You’ve hit the wall. You realize that you can NEVER pay off your debt (thunder cracks in the background and a lone wolf howls as rain starts to pour). Thanks to the good ol’ credit card companies who brought you high limits and sweet, sweet low or no interest deals, your non-housing debt has grown to where it may be bigger than your mortgage.
You are not alone. You are among the people who buy in to lottery pools at work and set up biweekly mortgage payments, people with “good” jobs who live well and are broke. They have no savings other than what is forced on them through payroll deduction. They include inheritance from parents who are alive and kicking (and may also be broke) in their retirement planning. They unquestioningly pay for orthodontics and orthotics while earning points on credit cards. Along with a supersized mortgage, the bank gives them a line of credit which they use to pay off credit cards every month, so they can avoid the incredibly high interest that credit cards charge. The credit card company congratulates them and raises the limit. Next month the kitchen renos go on the credit card. And so on.
Until the line of credit reaches the max. Now what? Along comes an offer you can’t refuse – a low interest credit card – 3.99%, 1.99%, maybe even 0%, maybe from the same company as your regular credit card. You can use this low interest card to transfer money to your regular credit card or bank account. Problem solved – until the low interest period runs out and you start playing a stressful musical game of moving balances from one low interest card to another, until all the offers run out and you have no chair to sit on. Your debit is unimaginably high and you are paying normal credit card rates at 20% or more.
Is it your fault? No. You’re probably feeling guilty but I’m going to let you off the hook. You were trying to manage your debt with low interest.
Yes, you bought a bigger house than you really needed. And yes, your cars are more expensive than they should be but the payments are manageable. OK, you buy things at Costco that aren’t on your “list” because they’re’ such a good deal, and those coach lamps on the three-car garage look awesome. Sure, you made your usual winter getaway even though you had to put in on a credit card and knew you had no money to pay for it. Even with the usual credit card interest rate, you should have been able to pay it off in a few months but then one of the kids got “invited” to join an elite sports team and the registration fee was almost $1500. And then your niece got married and between the jack-and-jill and the wedding gift and paying for your daughter’s flower girl’s dress it cost almost $1000.
It’s not your fault. It didn’t happen because you are a compulsive shopper or gambler and you overindulged. The banks and the credit companies and the car dealerships didn’t force you to overspend and they were there to lend a helping hand at a very reasonable rate when you needed money. They based their lending on your good credit rating and your good income – and your good payment record. They are the experts – why would they loan you money if you weren’t able to pay it back? They made you think it was OK.
And yet here you are. Your consumables debt is more than what you make in a year. If you had to make actual payments you would be bankrupt in a few months. If any of life’s 3D disasters happened – downsizing, death or disability – you don’t have enough savings or equity to pay it off. Is it their fault?
No. I will go out on a socialist limb here and say – much as you should not have overspent – the government is to blame. Government requirements for home financing are excruciating. But auto dealers and credit card companies are not supervised in the same way. When my kid turned 18 they were given a $2600 limit on their first credit card – no job, no plans, no income, just a student credit card. Why? They never spend more than $100 on their credit card, mostly for online purchases and you can’t put tuition on a credit card. A client’s 30 year old son makes $35000 and owes $35000 – on two credit cards. When credit card companies approve a new card, they look at your credit file and can see how much credit you have on other cards. No one’s credit card limit should be as high as their annual income. And don’t get me started on car payments – that is a whole ‘nother blog.
I’m not even addressing the ridiculous interest rates that credit card companies are allowed to charge. If you owe $2000 on a credit card and they charge 20% annual interest, that’s horrible but it’s $400 and you have a hope of paying it off in a year. When you owe $20,000 on a credit card, that same interest is $4000 – you can’t even keep up with the interest never mind pay off the debt. The high limits mean people are well beyond their ability to pay off the balance – so they can keep paying the interest for a very long time. Why would our government – any government – allow this? American Express – the original credit card – had the right idea – pay it off every month or you don’t get to put any new charges on it. Credit cards companies should be held to that standard and they are not. They are allowed to intentionally put you in a financial situation that you cannot handle.
So, contact your government representative and urge them to make this a priority. Part of the penalty for the credit companies who got you into this situation should be that they have to carry your debt at the low interest rate they offered you in the first place until you pay them back – over about 25 years.
In the meantime, impose your own limits. If you can’t pay your credit card off by the end of the month, don’t put any more charges on it including trips, gifts, or orthodontia. Tell the dentist you’ll be returning the wires or that you need to make a payment plan.