Credit card debt is probably the purist and most alluring form of consumer debt in existence. There really is something magical about the process of seeing that big 3D TV, desiring that big 3D TV, swiping a piece of plastic and then suddenly owning that big 3D TV. And yes, this magic really seems to have hexed most of the developed world.
It is a fact that we are an extremely short-sighted species and the instant consumption pleasure derived from credit cards is a very strong driving force behind their popularity (the average American owns about 4 credit cards). As explained in a previous post though, consumer credit plays a big role in the global debt crisis because it allows people to go deeper into debt without improving their ability to pay back that debt (with interest). Actually, buying that big new 3D TV on credit might actually lower your ability to pay back the debt by turning you into an even bigger coach potato. Naturally, if our debt keeps mounting and our ability to pay back this debt keeps declining, a debt crisis is a pretty predictable outcome.
One reason often given for consumer credit is “smoothing out consumption” through the ups and downs of life. But come on, wouldn’t it be better to just under-consume a little bit in order to build up sufficient financial resilience so that you have the savings required to smooth out consumption? This strategy will save you a lot of money (because you earn interest instead of paying interest) and will also allow you to sleep a lot better.
Setting up an intelligent micro-environment in which you will automatically “smooth out consumption” through saving instead of credit cards is very easy: cut up all your credit cards and get yourself a debit card linked to a bank account that cannot be overdrawn. It really is that simple. Most importantly though, this environment will enable you to break the debilitating perceived link between consumption and happiness (which is complete BS) and allow you to focus on those things that bring real sustainable happiness: optimal health, nourishing personal relationships and free creative expression. All it takes is a few snips with a pair of scissors…
Finally, it must be clarified that there are a limited number of things traditionally called “consumer debt” which are not evil, simply because they are actually investment loans and not consumer loans. Student loans, which will be discussed in the next post, is the most prominent example of this misconception, simply because an education is an investment in your most precious asset: yourself. In general, the rule is simple: if the item bought by the loan will significantly increase your ability to pay back the loan, it is an investment loan (which is good). If not, it is a consumer loan (which is bad). Committing to the little bit of self-discipline and foresight required to actually follow this simple rule will get your personal finances in shape in no time.