Why Don't People Manage Debt Better? • Hacker News Board

Re: Why Don't People Manage Debt Better?

#61

Post by douche » Fri, Feb 19, 2016, 3:42 PM UTC

imgabe wrote: post #17

Anyone at a point where they are making monthly payments on multiple credit cards has already lost the debt game. People don't manage debt better because they have been marketed to and taught to use debt completely inappropriately. Debt should be used to purchase an asset that will appreciate or otherwise provide an income in excess of the interest payment on the debt. Full stop. That is how businesses use debt and t…

It's pretty numb to use debit cards as opposed to credit cards, for various reasons.

A.) You can't over-draw a credit card, and get hit with overage fees or bounced-check insurance, or all the other things banks do - particularly with the slightly nefarious way they often choose to order your transactions when they close their books. Particularly troublesome with businesses that put in a hold on your card, then charge you the actual price, and then refund the hold (like many fuel stations)

B.) If you don't get paid weekly, and instead biweekly, monthly, or more sporadically than that, putting all spending that doesn't absolutely have to be drawn directly from your checking accounts on credit makes a huge amount of sense. You can float that tank of gasoline, or your groceries on credit, but when the heating oil needs to get filled, or the rent is due, you need cash in hand, and you don't want to get caught short. More of an issue if you're not paid very well to begin with and haven't got much cushion built up.

C.) Buy stuff on credit, collect the reward points, pay it off before the next statement, and you've gotten free money for things you'd have to buy anyway.

D.) If a credit card gets stolen and somebody goes on a spree with it, you just dispute the charges with your bank, they issue chargebacks, no real money is gone from your account. With a debit card, good luck, they just vacuumed money out of your real checking account.

Re: Why Don't People Manage Debt Better?

#62

Post by JoeAltmaier » Fri, Feb 19, 2016, 3:42 PM UTC

maxxxxx wrote: post #60

anon4 wrote: post #24

Don't fall into debt. If you must fall into debt, then do so to a friend at no interest. If you still have to fall into debt, do so to a reputable bank and pay it off as quick as you can - sell whatever assets you have if you must. This of course applies to private individuals, not companies, banks or other institutions.

I would advise people not to lend money to friends and family. I have done it several times and every time it led to problems and a lot of pain.

Giving money, that can work. With a glad heart.

Re: Why Don't People Manage Debt Better?

#63

Post by cm2012 » Fri, Feb 19, 2016, 3:43 PM UTC

imgabe wrote: post #17

Anyone at a point where they are making monthly payments on multiple credit cards has already lost the debt game. People don't manage debt better because they have been marketed to and taught to use debt completely inappropriately. Debt should be used to purchase an asset that will appreciate or otherwise provide an income in excess of the interest payment on the debt. Full stop. That is how businesses use debt and t…

Eh. I used to make a lot less money than I did now. I got into around $10k of debt, mostly buying "useless" things that made life fun, like ordering in, etc. Now I make 4x what I used to and the debt is trivial to pay off. Debt also makes sense when money is worth more to you now than later.

Re: Why Don't People Manage Debt Better?

#64

Post by yummyfajitas » Fri, Feb 19, 2016, 3:43 PM UTC

carlob wrote: post #50

yummyfajitas wrote: post #27

Earlier quoted context omitted.

Consumption smoothing is a perfectly valid use of debt. Suppose I have utility = log(consumption), but my income is volatile. If I have 1 income in year 1 but 10 income in year 2, and use no credit, my utility is log(1)+log(10) = 2.3. If I use credit, I can have utility log(5.5 / (1+r)), with r the interest rate. At 10% interest, that's 3.2. At 20% interest that's 3.0. At 50% interest that's 2.6. So even at 50% inter…

Correct, but a bit misleading. You're taking a person that has income that increases tenfold over a year. For most people the rate of increase of income is smaller than credit card interest rates, and you can really justify high interest rates when you assume that you're going to make a lot of money next year, but then again Steinbeck said that most Americans think of themselves as temporarily embarrassed millionaire…

Probably "year" is the wrong time period, but lots of people have very volatile income. A consultant can easily have 10x variance in income from month to month. A musician or actor might have 0 gigs one month and 5 gigs the next.

Shortening the time period just lowers the financing costs.

Re: Why Don't People Manage Debt Better?

#65

Post by RUG3Y » Fri, Feb 19, 2016, 3:45 PM UTC

kdamken wrote: post #42

Better question: why do people buy things they can't afford and most often don't need, putting themselves in this position? So many of my peers don't make a lot of money, but then still go out and buy a new or newish/used car and put themselves on a multiyear payment plan. "Oh but it's only 200 a month, I can swing that". Repeat for like 3-4 other things and suddenly they're always complaining they have no money and…

Mr. Money Mustache is pretty awesome but the guy had a very highly paid job that allowed him to retire early. Some of us are fiscally responsible and don't make all that much cash - I find that a lot of his advice is fairly useless unless you have some money to begin with.

Re: Why Don't People Manage Debt Better?

#66

Post by yequalsx » Fri, Feb 19, 2016, 3:45 PM UTC

kdamken wrote: post #42

Better question: why do people buy things they can't afford and most often don't need, putting themselves in this position? So many of my peers don't make a lot of money, but then still go out and buy a new or newish/used car and put themselves on a multiyear payment plan. "Oh but it's only 200 a month, I can swing that". Repeat for like 3-4 other things and suddenly they're always complaining they have no money and…

I think the answer to your question depends on how much free will we actually have. There is strong evidence that we, speaking in terms of averages over the whole population, are successfully manipulated into purchasing unnecessary things. Even though it appears to each individual that each purchasing decision is an exercise in free will.

Re: Why Don't People Manage Debt Better?

#67

Post by theklub » Fri, Feb 19, 2016, 3:46 PM UTC

imgabe wrote: post #17

Anyone at a point where they are making monthly payments on multiple credit cards has already lost the debt game. People don't manage debt better because they have been marketed to and taught to use debt completely inappropriately. Debt should be used to purchase an asset that will appreciate or otherwise provide an income in excess of the interest payment on the debt. Full stop. That is how businesses use debt and t…

Unless of course there is no interest for X months. Then what's the difference, assuming you are smart and pay it off in time.

Re: Why Don't People Manage Debt Better?

#68

Post by crystalmeph » Fri, Feb 19, 2016, 3:47 PM UTC

zrail wrote: post #19

imgabe wrote: post #17

Anyone at a point where they are making monthly payments on multiple credit cards has already lost the debt game. People don't manage debt better because they have been marketed to and taught to use debt completely inappropriately. Debt should be used to purchase an asset that will appreciate or otherwise provide an income in excess of the interest payment on the debt. Full stop. That is how businesses use debt and t…

> Debt should be used to purchase an asset that will appreciate or otherwise provide an income in excess of the interest payment on the debt. Full stop. In 2014 only 34% of households carried credit card debt month to month[1]. The majority of households pay it off every month, simply using it to smooth out irregular cash flow while potentially racking up rewards. They're not purchasing an asset, per se, unless you c…

I'm not well versed in the history of consumer debt, but 34% carrying month-to-month debt seems historically high, since consumer credit cards were only widely introduced in the mid-20th century[1], and took a few decades to reach mass penetration.

The page you linked to shows that even the events of 2008-2009 didn't set people back from expanding their personal debt, which is surprising to me. Given our fairly short history with widespread revolving debt, we might be setting ourselves up for another, bigger, debt crash that the government won't be able to bail out.

Of course, revolving debt does have a longer history than that, but it was often used as a "barely-there" facade for stealing money from the poor, e.g. coal miners living in a company town weren't paid enough to buy food at the company store, so they ended up in life-debt to their supposed employer. Of course, in that scenario, the company made money even if the coal miner died without paying them back the full amount they owed. These days, companies trade consumer debt like it's real money, and get in actual trouble when the music stops.

[1]http://www.creditcards.com/credit-card-news/credit-cards-his...

Re: Why Don't People Manage Debt Better?

#69

Post by remyp » Fri, Feb 19, 2016, 3:47 PM UTC

hcmag wrote: post #38

Could someone well-versed with bankruptcy please explain the pros/cons of going that route? I have heard that credit card debt is essentially free money because filing for bankruptcy will wipe out all the debt. If you already own a home/car, and have no intention of getting a loan in the next 10 years, what is wrong with this strategy?

A pesky thing called morality and the fact that incurring debt with the intention of later going bankrupt is fraud?

Re: Why Don't People Manage Debt Better?

#70

Post by dpierce9 » Fri, Feb 19, 2016, 3:47 PM UTC

One wrinkle here is that some debts have variable rates. For instance, if you have a balance with a 3% variable rate and one with a 5% fixed rate, but you are in a rising interest rate environment, the 5% fixed rate loan is effectively a hedge on the 3% loan. It drags up your effective loan rate while interest rates are lower than 5% but it lowers your effective rate if rates rise above 5%. You can determine whether this is a valuable hedge by estimating the likelihood of rates exceeding 5% long enough to make exceed the cost of the hedge.