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Why Don't People Manage Debt Better?

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Re: Why Don't People Manage Debt Better?

#201

Post by marcosdumay »

infinite8s wrote: post #98
maxsilver wrote: post #86

Earlier quoted context omitted.

American Express has a card "Blue Cash Preferred". You get 6% back on Groceries (up to $6k/yr), 3% back on gas, and the card has a $75 annual fee. If you only use the card to spend $100/week on Groceries, you get $312 in cashback rewards. Subtract the $75/yr fee, and Amex paid you $237 to use their card that year. (Amex isn't the only card like this -- there's lots from MasterCard and Visa as well. This card in parti…

I don't understand these reward schemes. Surely they are being funded by higher merchant fees, which means merchants charge more, which just means that the rewards are a transfer scheme between people who pay by cash/unrewarded cards and those with rewards cards.

That's the prisoner dilemma, and leads to the expected results.

Re: Why Don't People Manage Debt Better?

#202

Post by Jtsummers »

barrkel wrote: post #189
Jtsummers wrote: post #162

Earlier quoted context omitted.

> If you're using it to buy an asset that appreciates more than the interest on the debt, what makes you think that you're a better judge of asset prices than the people lending you the money? Why wouldn't they just buy the asset directly, and cut out the middleman? Because it's not their (core) competency or they don't want the risk. I could start my own company printing indie games. But I have no connections in the…

Someone working in a company printing (?) indie games isn't an asset, though (except in the accounting sense of the lender, as a stream of repayments; but that's not the perspective that's under discussion - individuals borrowing, not lenders lending). Point being my rationale was slightly different; it includes more things - it's more general - and it's a bit more negative on the idea of simply buying a rent produci…

You asked: Why wouldn't the lender buy the asset directly?

The reason is: They don't need it. They want income, not assets.

Re: Why Don't People Manage Debt Better?

#203

Post by encoderer »

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…

My understanding is that about 75% of households use credit cards. So, that's about half of them.

Re: Why Don't People Manage Debt Better?

#204

Post by TwiztidK »

nisse72 wrote: post #170
grecy wrote: post #112

Earlier quoted context omitted.

In scenario 1, when you realize that paying so much money for a TV is nonsense, you can spend that money on something else, and/or stop going to work, or reduce work hours. In scenario 2, you're stuck going to work for the entire 12 months to pay off a TV that will be obsolete by the time you finish paying for it. Scenario 2 robs you of your choices, because you're making a promise of future labor. Scenario 1 leaves…

Since when does a television become "obsolete" after a year? Or even after 5 years? Just because it doesn't have built-in support for Netflix or whatever the latest thing is? This is the sort of idea that lures people into overspending in the first place. For the record, mine is close to 18 years old and continues to work just fine for watching broadcast television. Yes it's fatter than those newfangled flat things,…

> Yes it's fatter than those newfangled flat things, but it doesn't watch me watching it, it doesn't record my conversations, and it doesn't report my viewing habits back to the mother ship. One day it will fail and I'll be forced to get a new one.

It's actually getting pretty difficult to buy a new "dumb" TV these days. The last TV I bought was in November 2014, it's a normal 50" Plasma screen TV with zero connected features. Some of my relatives liked the TV and asked me to find them one like it and I can't. Apparently TV makers have decided that making good TVs isn't important and packing them with smart features I don't want or need is the way to go.

Re: Why Don't People Manage Debt Better?

#205

Post by matthewaveryusa »

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…

Another reason to take on debt, as an individual, is to leverage your position -- It's indirectly related to provide income in excess of interest payment. An example would be to take on debt to purchase a vehicle to broaden the area where you can potentially work. You have to make sure that you buy a vehicle at the optimal marginal return (so close to a clunker.) and I think that's where the problem resides: I see individuals have possessions that cost way below the optimal marginal return for status.

Re: Why Don't People Manage Debt Better?

#206

Post by johnward »

kagamine wrote: post #16
pilom wrote: post #8

This is showing that the Dave Ramsey "debt snowball" (pay off smallest debts first to get a psychological win and some breathing room by having fewer minimum payments) is a more effective way to get people to pay off many separate debts than paying off "highest interest rate first" even if it is less optimal for a rational actor. Just another case of people aren't 100% rational that many people have known for a while…

That does sound rational though, by paying off the small debts you reduce the amount of information you have to comprehend. It may not be ideal financial advice, but it will make the remaining debt easier to manage on an emotional level. You also get the peace of mind that those smaller problems will now not spiral into larger problems. You are free to focus on a resolution to the problem.

I'm following the snowball method now. The reason I like it is that I free up money faster. If I have $4000 on a credit card and the minimum is $100 a month. If I pay that smaller balance off quicker I free up that $100 a month to be used towards the next debt.

Re: Why Don't People Manage Debt Better?

#207

Post by c22 »

ksdale wrote: post #156
mafribe wrote: post #107

Earlier quoted context omitted.

Why are you sure that for you, $800 worth of food is less than 2 x utility of eating $400 worth of food? How would you convince somebody who thinks you are wrong (e.g. deluding yourself, or not telling the truth)?

You could ask them to buy twice as much food as they normally would every time they go to a restaurant or the grocery store. They can either eat until they feel uncomfortable and gain weight or they can start throwing a ton of food away, either way the utility per dollar spent goes way down past a certain point. Note that this assumes that you are already able to spend an optimal amount on food.

What if you asked them to buy half as much food? Would their default mode be less than twice as good as starving?

Re: Why Don't People Manage Debt Better?

#208

Post by elf25 »

epimetheus wrote: post #158
ac29 wrote: post #95

Earlier quoted context omitted.

> Suppose you have enough disposable income to pay for a new $1200 TV over the course of 12 months. In scenario 1, you save $100 each month. The bank pays you 0.5% interest. As of January 1st next year you'll have a new TV and $2.75. In scenario 2, you put $1200 on a credit card with a 10% APR. You pay $100 each month towards the credit card bill. As of January 1st next year you have a TV you've been watching for a y…

Actually, a lot of places constantly run "Zero Interest If Paid Off In 12 Months" deals all the time. Lowes, Furniture stores, and even some Credit cards. We've paid off Couches, A refrigerator, a new Sewer Drain, and several other things (a nice Kitchen Table most recently) this way. It's not as good as saving for it, and getting a few dollars of interest, but that's a marginal gain anyway.

nothing wrong with zero % interest! If you have the means to get it paid off. That's called using other peoples money.

Re: Why Don't People Manage Debt Better?

#209

Post by Retric »

pessimizer wrote: post #182
Spooky23 wrote: post #172

Earlier quoted context omitted.

It's always better to have problems with somebody else's money when your contract scopes your liability narrowly. Even if I follow your advice and do A, B and C, D is still a problem that I need to deal with. Case in point. I had a two-week hotel stay and facility booking at a resort on my AMEX. The hotel fucked up and double-charged me for the event -- to the tune of $20,000. Due to their obtuse bureaucracy and over…

Am I wrong, or wouldn't exceeding your credit limit have exactly the same effect?

Having x credit limit costs vastly less than x cash in a checking account.

Re: Why Don't People Manage Debt Better?

#210

Post by true_religion »

ac29 wrote: post #95
bradleyjg wrote: post #58

Earlier quoted context omitted.

I don't think such an absolute position is warranted. It's true that saving up for a big purchase will end up costing you less money than borrowing to pay for it and paying it back. But you will have the item purchased for less time. Suppose you have enough disposable income to pay for a new $1200 TV over the course of 12 months. In scenario 1, you save $100 each month. The bank pays you 0.5% interest. As of January…

> Suppose you have enough disposable income to pay for a new $1200 TV over the course of 12 months. In scenario 1, you save $100 each month. The bank pays you 0.5% interest. As of January 1st next year you'll have a new TV and $2.75. In scenario 2, you put $1200 on a credit card with a 10% APR. You pay $100 each month towards the credit card bill. As of January 1st next year you have a TV you've been watching for a y…

I think the whole analogy is moot since anyone buying a TV would, at least, try for store financing.

A quick look up says that Best Buy offers 11.9% APR for select purchases, or 25% for others.

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