Staying in debt is not a solution

February 6, 2018

Although bankers seem bent on creating perpetual consumer debt, staying in debt is not a solution that works for consumers. Have you ever looked a credit card statement with a balance of $5,600 and an interest rate of 17% and wondered why your minimum required monthly payment is only $10?

I shake my head every time I look at the minimum monthly payment scheme set up by the banks. Paying ten bucks a month, when interest is adding onto the account at $79 per month, is not even coming close to paying the interest. At the end of two years of such payments you would owe an additional $2,000 on the card.

So how is this even legal? That is a very good question that should be put to our lawmakers.

Finance companies used to use the same tactics as banks (are now using) back in the 1980s and 1990s – eventually they found the business model wasn’t working. Keeping consumers in ever increasing debt may look good for the bankers’ bonuses, because receivables are considered “assets” on the banks balance sheet, “just look at all the assets we have”.

Banks can borrow and lend money based on the “assets” they have, including unpaid loan balances. But what if the loans are never paid? That really wouldn’t matter provided it doesn’t all happen at once. Banks expect to write off some accounts, in fact they rarely write off all the accounts they have allowed for.

By continuing to extend credit terms and increasing limits bankers avoid defaults. Hopefully, for bankers, at some point, consumers will either consolidate unsecured debts into a mortgage or die and pay out their accounts with insurance proceeds and life stays in balance.

But how can staying in debt be a good solution to your debt problems? Sure, you have ever increasing credit limits, and you could use credit to pay for vacations and other luxury items you simply can’t afford on your salary but at some point, there will a very real cost. In fact, you may notice it each month when you realize that your pay cheque doesn’t cover all your living expenses and you must rely on debt to live. Month by month debt insidiously drains your income.

Perpetual debt may be good for bankers but it isn’t good for the economy or for consumers burdened with escalating debt loads.