How To Avoid The Debt Death Trap

Fact: there is exorbitant debt in America. The stats speak with biting clarity. Consider a few:

1. As of July 2011, in U.S. houses with credit cards, the average credit card debt was $15,799. (FR G.19 report, 7/2011)
2. In April 2009, college seniors graduated with average credit card debt over $4,100. (Sallie Mae, "How Undergraduate Students Use Credit Cards")
3. In May 2008, the average college graduate had approximately $20,000 in consumer debt. (Demos.org, "The Economic State of Young America")
4. In 2009, total bankruptcy filings reached 1.4 million, with 94% of filings personal. (American Bankruptcy Institute)

What isn't so clear is the primary cause of consumer debt. There are two possibilities:

1. The borrower is at fault; or
2. The lender is at fault.

The borrower carries the majority of the blame. Credit cards do not force you to go into debt. Merely possessing a credit card does not, through some strange, inexplicable force, compel you to swipe the plastic whenever you start salivating. Neither does having a credit card mysteriously shut down your ability to click "Pay Current Balance" and submit it.

Ludwig von Mises said that we never do something that we do not fundamentally want to do. He was correct. Granted, you really can be compelled to do something entirely outside your own will if your body parts are physically manipulated. But even then, you're not really doing it anyway, so it doesn't matter. Volition is at the heart of all action.

However, lenders do not make things easy. This applies to many different types of lenders, but credit card companies immediately come to mind.

How do these companies make their money? By the interest payments they receive from late-paying (or never-paying) customers. How much do they charge? Typically 18-22%.

Think about that for a moment.

If a financial advisor could guarantee his clients an 18% rate of return on their investments, he'd corner the market within days. Yet that's exactly what credit card companies are doing for themselves: a guaranteed 18%+ return . . . for themselves at your expense.

This, of itself, isn't necessarily wrong. However, their advertising and "perks" are often shady. Consider the fact that paying the minimum will never, ever let you pay off your debt, no matter how long you live. Credit card companies are smart. The "minimum payment" isn't the smallest payment amount that you can eventually pay off your debts with. It's the amount whereby the credit card companies can profit the most from your stupidity.

Constant advertisements attempt to lure in customers with bad credit. "Got bad credit? We can help!"

Yes this is true, except they haven't finished the sentence: "We can help . . . destroy you even further in the long run!"

Having bad credit is a disease, and credit card companies are most certainly not doctors. It's the same rationale as "I've gambled all my money away, so I'd better gamble even more to get it back." If you have a debt problem, credit cards that "don't care about your bad credit" are the last place you want to go.

But what was that about a 0.00% APR? Right, for 6 months, and then they'll yank it up to 20%+ when you already have a $2500 balance, which you thought you could get away with because of the "0.00% APR."

We've heard from mums and pops and grams and gramps that we shouldn't go into debt. But our common sense tells us, too -- if we listen. Borrowers have no excuse. Lenders don't make it easy, though. If they aren't engaging in unethical business and advertising, then they're pretty close.

Read. Learn. Then practice occasional self-denial. Surprising rewards await if you do.