September 5, 2017

Or is it simply a case of “you have got it all wrong, change your attitude”?

The DSM (or Diagnostic and Statistical Manual for Mental Disorders) lists “cognitive dissonance” as one of the symptoms (or indicators) of mental disorders such as schizophrenia and manic depression.  Cognitive dissonance plays a huge part in the way that people think of credit and debt.

Is it rational to equate extreme indebtedness to “economic stability”?  Perhaps that should be a rhetorical question since we live in such an incredibly irresponsible and uncertain economy that the US Federal Reserve has $9 trillion that the Treasury Board cannot account for.   But that is precisely what people do, and all too frequently.  There is a huge divergence between what we think and what we do.

Many, indeed most, people “think” it is important to have “good credit” – in fact having “good credit” is a source of pride.  But what having “good credit” really means is having “access to debt”.  Perhaps ironically, having access to debt requires a person to already be in debt.  Trustees in bankruptcy see people who owe tens of thousands of dollars on credit cards – sometimes even more.  Many of these people have absolutely no hope of ever paying it off, never, ever!

Clearly, looking from the outside, their thinking has become somewhat distorted maybe it really has become a mental health issue.  Why would someone so far in debt that they have absolutely no hope of ever paying it off not want a real solution that not only removes them from the stress of the indebtedness but also provides a mechanism for remaining debt free?  But that is exactly the point – many people avoid dealing with their issues and even seek out more costly alternatives that just can effectively increase the problem.

For others who do follow the steps necessary to get out of extreme debt situations, typically using a bankruptcy or proposal, the first thing they want to do is get right back into debt again.  “O.K. I got my discharge – now when do I get My credit back?”  From the outset, many people are hung up on the idea of “owning a home”.  “One day I want to own my house” but using the notion of cognitive dissonance doesn’t that really mean “one day I want to be indentured to a bank”?

The difference between owning and owing should be obvious but many people miss the point.  Let’s say I have my name on title on a house that is worth $200,000 but by some quirk of fate, even though I put 5% down at the time of purchase (which was eaten up by incidentals) I owe $194,000 to the bank on the mortgage.  If the house sold I would lose approximately 10% of the property’s value immediately in notional costs (real estate commissions, legal fees and mortgage penalties, etc.).  So the liquid value of the house is actually about $180,000 – in other words I am in the hole for about $14,000.  What do “I own”?  If you said “I own $14,000 in DEBT” you would be correct!  In short I actually own less than nothing.   If I rent and have the same income and everything else is the same – I am actually better off, owing less debt!

Using the same flawed logic:  “I want good credit” really means “I want to be in debt”.  What are you really saying?   Do you mean that you want to be back in debt?   I have asked many times “why do you want to be in debt?”.   The response is typically “No, I don’t want to be in debt, but what am I going to do if I want to buy a car or replace an appliance?” I refrain from rolling my eyes and suggesting that “you save up your money until you can afford to live the lifestyle of your dreams”.

Let’s carry on with the discussion:  Imagine that you have a house as described above and you are effectively in the ditch for $14,000, you also have a late model car, you acquired (not bought because you never paid for it, you never actually “bought” it), it cost $35,000 but now is only worth $22,000.  Because of the costs of interest you still have $36,000 left to pay off.  The difference between the amount owed on the car and the car’s value is also $14,000 which means that now you are $28,000 in the ditch.  The Canadian Median Income is a mere $27,600 knowing that you can rest assured that you are in debt to the tune of more than one full year’s gross salary for more than half of all Canadians.

But that’s not all you get with your “good credit”.  Like most people you have probably been using your credit cards and line of credit – because, after all, you have “good credit”.  If that is the case, you probably owe the average Canadian amount of around $29,000.  If you were to average out the interest rates it would likely be an amount of about 15%.  Using minimum monthly payments to pay down that amount of debt would require you to be nothing less than immortal.  You would have to live for in excess of 120 years to pay off that debt with minimum monthly payments.  But for our discussion we will assume that you decide to take a more aggressive approach and pay the debt off in seven years.  In that case you would pay about $18,000 in interest with monthly payments of close to $560.

With your “good credit” if you sold everything in your possession (again I refrain from saying “everything you own”) you would still owe your creditors $46,000!  Wouldn’t you rather have “something”, assets, left over than “less than nothing”?  Cognitive dissonance, if you didn’t already know or haven’t figured it out is the difference between beliefs that you hold and the way you actually behave.  You believe you need to have “good credit” but you pursue “extreme indebtedness”.

After reading this if you think you still want “good credit” do yourself a favour and call your EAP and ask to talk to a counsellor – tell the therapist that based on something you read on the internet you have self-diagnosed a “clinical obsession with being in debt” and get some help!  Or simply change your attitude towards the meaning of “good credit”.