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Why Don't People Manage Debt Better?

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Re: Why Don't People Manage Debt Better?

#111

Post by ethbro »

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…

> Run the math again at 18% APR ($133 in interest over the 14-month payoff period) or even 24% ($185 in interest over the 14-month payoff period), and you quickly see just how much premium it costs to get that TV a year earlier.

I feel like the issue isn't just the TV. It's that it's the TV, plus the next thing, plus the next thing. Or in other words, tiers of debt usage from best to worse: (1) completely avoid paying interest charges, (2) pay interest charges on large purchases with full knowledge and planning and in a responsible manner, (3) pay interest charges without knowledge of what you're paying or what to do about it.

Personally, I think it's a failure of financial literacy of the US educational system on one of the most important aspects of kid's lives. I have met incredibly educated people that are still ignorant about how credit cards/interest charges work and only internalized "Never use credit cards!" advice. I've also met less educated people who never think past "This is what it says the minimum payment is, so I pay that."

Neither position is good. And they. aren't. that. complicated.

The disclosure sheet gives you annual fee (if any), APR when interest is charged, and any penalties that may result in an APR adjustment. After that it's simply "If you have a >$0 statement balance from the previous month after your due date and payment, then you begin accruing interest on the daily total of your balance." Not rocket science.

Re: Why Don't People Manage Debt Better?

#112

Post by grecy »

bradleyjg wrote: post #58
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…

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…

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 all your choices on the table.

Re: Why Don't People Manage Debt Better?

#113

Post by ethbro »

pessimizer wrote: post #102
douche wrote: post #61

Earlier quoted context omitted.

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 charg…

A) Opt out of "overage fees and bounced-check insurance" which would be the problem here, not debit cards. Keep track of your own finances. B) Don't live check to check. Keep track of your own finances. C) And if you fail to do that once (because you're probably living check to check), you've nullified any free benefit you ever received. D) Horseshit. I had my card stolen by the Target breach, there were charges on i…

> B) Don't live check to check. Keep track of your own finances.

I'm not saying this to be aggressive, but you're missing something in the calculation. http://www.investopedia.com/articles/03/082703.asp

Re: Why Don't People Manage Debt Better?

#114

Post by dragonwriter »

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.

I think you are neglecting the fact that, even if some people don't carry a balance, most credit card users do, and the rewards scheme acts as an incentive (perhaps not a rational one, but people demonstrably don't behave rationally) to additional use of the card, all other things being equal. So, credit card issuers probably make up the additional costs of rewards cards in interest and fees from those cardholders, on average, even though perfectly disciplined use provides a net win to the cardholder.

Re: Why Don't People Manage Debt Better?

#115

Post by cperciva »

infinite8s wrote: post #97
yummyfajitas wrote: post #87

Earlier quoted context omitted.

My utility from eating (in one time period) $800 worth of food is less than 2 x utility of eating $400 worth of food. Doubling my consumption doesn't double my happiness. Concavity is a way of formalizing this intuition; it means, roughly speaking, that f(2x) Econ uses log(x) as a simple model, but the same idea would apply to any convex function albeit with different arithmetic.

Thanks, that makes sense. I guess that's why flat income tax rates are considered "unfair" since they are modeled on a linear expectation of utility.

Not really. Completely flat percentage taxes (e.g., pay 10% of every dollar you earn) reduce everybody's utility by the same amount if you have a utility = log(dollars) model. Actual "flat taxes" (e.g., pay 10% of every dollar you earn after the first $10k) have a larger impact on the utility of high income earners (at high incomes you approach a change of log(0.9), while at low incomes the impact of the tax on utility reaches zero).

This is however an argument for poll taxes (e.g., "every adult must pay $1000") being unfair, as well as sales taxes on inferior goods (warning: technical term) if the regressive effects aren't compensated by a quasi-fixed-dollar tax rebate.

Re: Why Don't People Manage Debt Better?

#116

Post by douche »

pessimizer wrote: post #102
douche wrote: post #61

Earlier quoted context omitted.

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 charg…

A) Opt out of "overage fees and bounced-check insurance" which would be the problem here, not debit cards. Keep track of your own finances. B) Don't live check to check. Keep track of your own finances. C) And if you fail to do that once (because you're probably living check to check), you've nullified any free benefit you ever received. D) Horseshit. I had my card stolen by the Target breach, there were charges on i…

> D) Horseshit. I had my card stolen by the Target breach, there were charges on it all over Europe, and within a week I had every penny back.

Let's say that week happens to be the one when your rent/mortgage is due, your car payment is due, your student loan payment is due, etc. It doesn't matter that the money goes back into your checking account eventually, if it's not there when it needs to be, you get hit with overdrafts, bounces, late fees, marks against your credit history. Those aren't things you can just "opt out" of.

Using a credit card is a useful layer of indirection and buffer.

Re: Why Don't People Manage Debt Better?

#117

Post by pessimizer »

ethbro wrote: post #113
pessimizer wrote: post #102

Earlier quoted context omitted.

A) Opt out of "overage fees and bounced-check insurance" which would be the problem here, not debit cards. Keep track of your own finances. B) Don't live check to check. Keep track of your own finances. C) And if you fail to do that once (because you're probably living check to check), you've nullified any free benefit you ever received. D) Horseshit. I had my card stolen by the Target breach, there were charges on i…

> B) Don't live check to check. Keep track of your own finances. I'm not saying this to be aggressive, but you're missing something in the calculation. http://www.investopedia.com/articles/03/082703.asp

You should be more aggressive, because I don't understand the point that you're trying to make.

Re: Why Don't People Manage Debt Better?

#118

Post by pessimizer »

douche wrote: post #116
pessimizer wrote: post #102

Earlier quoted context omitted.

A) Opt out of "overage fees and bounced-check insurance" which would be the problem here, not debit cards. Keep track of your own finances. B) Don't live check to check. Keep track of your own finances. C) And if you fail to do that once (because you're probably living check to check), you've nullified any free benefit you ever received. D) Horseshit. I had my card stolen by the Target breach, there were charges on i…

> D) Horseshit. I had my card stolen by the Target breach, there were charges on it all over Europe, and within a week I had every penny back. Let's say that week happens to be the one when your rent/mortgage is due, your car payment is due, your student loan payment is due, etc. It doesn't matter that the money goes back into your checking account eventually , if it's not there when it needs to be, you get hit with…

I don't live check to check, and I don't keep all of my cash in a single checking account.

edit: I guess keeping cash surplus to my immediate needs in a savings account is opting out?

Re: Why Don't People Manage Debt Better?

#119

Post by cperciva »

newjersey wrote: post #47
jonknee wrote: post #23

Earlier quoted context omitted.

> 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 that is the only sensible strategy. Businesses use debt in all sorts of ways, they certainly don't limit it to buying assets. A common use recently is to fund share buybacks which is essentially an easy way to engineer higher earni…

I imagine when you "buy" your supplies and don't pay for them until about ninety days after you took delivery of the supplies, that is considered debt as well? I mean if I want to ship something, Fed Ex will ask for payment up front but when Amazon.com ships something they probably don't actually send the money right away. I am still trying to grasp this concept credit terms. I must add that I have had no training in…

I mean if I want to ship something, Fed Ex will ask for payment up front

They might ask for payment up front, but they'll quite happily take a credit card instead. Yes, credit cards are a form of transactional debt if you pay them off each month; they allow you to enjoy your purchases for ~ 1 month before paying for them.

Re: Why Don't People Manage Debt Better?

#120

Post by Wonderdonkey »

Paying off small debts first isn't just a "natural tendency." Consumer advice sites actually encourage this as a motivational strategy. Every single one of them.

Having read this, now I question the objectivity of those types of advice pieces.

For example, here's a story on US News that covers three strategies for paying off credit card debt. The first tip is to pay off higher interest cards. But the second is to pay off the smallest debts first and pay the minimum on the other cards. What?!?

http://money.usnews.com/money/personal-finance/articles/2014...

This "3 strategies" thing is very widespread, and all of the sites are the same, from bank sites to credit recovery sites to financial reporting in magazines and newspapers. The first that's presented always sounds complicated (calculate bla bla bla). The second strategy is always "pay smallest debt first." Nice and simple. If both are presented as good strategies, which do you choose? The one that requires work, or the one that seems simple?

I used to read these types of advice pieces when I had high debt following a layoff in 2002. I've recovered since then (paid off $65k in debt all at once with a cash out on my house, thus avoiding bankruptcy). And now the No. 1 rule is do not use credit cards to pay for things you can't afford. Use them only as a tool to stay on the grid so that you have a good credit rating so that you get better deals on everything that involves looking up your credit rating. (You'll get a lower price on a car, for example, if you have a better credit rating.) So take out a couple cards; make small purchases; auto-pay on a regular schedule. (Do not change you payment schedule or make extra payments. Some credit reporting agencies lower your score when you do this.)

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