8/19/2013 1:45 PM ET|
Why some people won't pay off debts
The Review of Economic Studies points to a perhaps unexpected reason for living with credit card debt. It's not that families can't pay their balance; it's that they don't want to.
Every month, about four in 10 households get a bill for credit card debt they will not pay off. That's according to a 2010 Survey of Consumer Finances conducted by the Federal Reserve Board.
Stereotypes abound for these families. Typically, we think of them as people who, for whatever reason, are on the brink of bankruptcy. We envision the woman with no self-control and a closet full of shoes or the middle-class family with the laid-off dad.
However, research published in The Review of Economic Studies points to a perhaps unexpected reason for living with credit card debt. It's not that families can't pay their balance; it's that they don't want to.
Cash vs. credit card debt
According to Irina A. Telyukova, an associate professor of economics at the University of California San Diego and author of the research, more than a quarter of households may have enough liquid assets to pay off their credit card balance.
The 2001 U.S. Survey of Consumer Finances found 27% of households had credit card debt averaging $5,766 while at the same time holding $7,338 worth of liquid assets such as money market accounts and savings accounts. The average APR for the credit card debt was 14% while these assets were earning around 1% interest. The numbers today may not be exactly the same, but 2010 figures are similar.
The question is, why pay 14% interest on debt when you have the money sitting in the bank? The answer, Telyukova says, is that families want to have a stash of money available to pay bills their credit card cannot cover such as:
- Mortgage or rent
- Day care or babysitting
- Major household or auto repairs
Smart use of credit card debt
So essentially, these families want the cash as an emergency fund and figure the credit card bill can wait. And it can certainly make sense to keep cash on hand, particularly if you think a pink slip or major expense may be in your future.
However, quite frankly, it seems silly to pay 14% interest on $5700 when you have $7200 in the bank. If you are one of the families hoarding cash while carrying a significant credit card balance, consider using these strategies instead:
- If your job is stable and you make more than enough to pay the monthly bills, you may want to take the plunge and simply wipe out your debt completely. Using the average numbers from 2001, you could pay off the credit card debt and still have $1,572 left for an emergency. Live lean for a few months and you probably could build back up the balance in short order.
- If you have reason to believe you might need the money in the future -- such as the 20-year-old furnace in the basement -- but can pay the bills using your income, think about paying down a portion of your balance and reducing the amount of interest you'll pay. You could pay off half your debt and still have enough in the bank for when the furnace gives up the ghost.
- If you are living hand to mouth and can't imagine losing your safety net, at least look at moving your balance to a zero-interest or low-interest credit card. When comparing balance transfer offers, don't forget to consider any transfer fees as well as the APR.
Regardless of which strategy is right for you, don't forget to rebuild your savings account balance as needed and limit future credit card purchases only to what you can pay off each month.
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The $1000 credit limit that I had set prior was ignored as a "courtesy" to me as one last charge. I informed them in no uncertain terms that I was not about to pay the charges since they had not honored my setting of the $1000 limit.
Eventually my lawyer convinced them to drop the monthly "late fees" when the ex finally paid up.
Sadly, some people have so little willpower to avoid charging up their credit card debt their only defense is to keep the balance high and near the limit. They know if they pay the card off instead paying down other liabilities they will just charge it to the limit again and then have twice as much debt.
I agree with Brutus625, debt is slavery, and a lot of people have been conditioned to accept it. But, it doesn’t have to be this way.
Brilliant, absolutely brilliant, Professor Telyukova.
Donald Trump or a Company baring the name "Donald Trump"
has filed for bankruptcy FOUR times ..
Why didn't the banks call on a default and foreclose,
ONE ANSWER: the debt was greater then the banks wanted to absorb..
Borrow until you aren't able to borrow and then borrow some more.. (buy companies, land, houses)
And I mean borrow tens of hundreds of thousands of dollars..until a million looks weak..
Keep your money because CASH IS KING..
DEBT The Great American Tool:
Why has the American public been called upon to bail out the large institutions on Wall Street.
Because of the great debt owned and the failure to pay would destroy the American Economy..
Why does the larger banks fail to foreclose on the smaller businesses or even other banks within their own portfolios and now the large number of homes past due..
Because of the greater debt owned and the failure to pay would destroy the American Economy..
The greater debt one has the more leverage one will find that they have over the banking institutions.
Cash can always be held in a safe at your home or in another country. The ability to borrow until one is over their head in debt is the American Way.
As American as Apple Pie and Chevy.
You can't pay off debt if it has tripled. Credit Crap needs to stop. If you have a credit card it is because you were offered it when your credit score was good -meaning The credit card companies with the credit score companies pass around your info to whoever asks for it without you knowing. You get this great offer in the mail and fill out the credit card app because you are pre-approved. You are offered credit you cannot afford. You start to use the credit and buy things you don't need. And then pay twice or three times for it. If you default because you become UNEMPLOYED and ILLNESS. The credit Card companies get Collectors to buy your account from them for 25 dollars matter how much you own, now a days THE COLLECTOR AGENIES are LAWYERS in the background and automatically go after you in court FORCING THE ENTIRE NATION TO PAY COURT COST AND FILE BANKRUPTCY but that's after they add 3000.00 interest to your already bill and then 9%. To make things worse it prevents you from getting a job to even attempt to back anything. Judgments get 15% of your pay for the rest of your life. If you have kids or a mortgage electric bill, a car payment you will soon default on those things to because the credit card got a judgment on any income after tax, but not after all your other bills. If a credit card company sues you or the collection agency-Lawyer, THE JUDGE ALWAYS GRANTS THE REDICULIOUS LAWSUIT TO THE PLAINIFF... MATTER WHAT you are screwed for the rest of your life... Banks, Credit Cards, And Insurance Companies all work very hard to get all your income from you, with of course the help of the Federal Government. There is no way out everybody once in their will have to file bankruptcy... DO NOT GET STARTED ON THIS PATH TO GOVERNMENT PAYMENT PLAN, Don't they get enough of our many in taxes??????? DON"T USE CREDIT CARDS DON'T BORROW MANY.... It should be against the law that you are even being set up for failure. The reason we cannot come out of these economic problems is because of credit. This whole country functions on credit. It not really money it just moved around so if think you have money. ONLY THE CASH STRONG WILL SIRVIVE... Think about the student loan set up, GO TO SCHOOL-YOU NEED AND EDUCATION, **** you learn everything you really need to know while you are on the job anyway. Nothing they actually teach you in these schools are actually used on the job. However as long as the Government can convince you that you need this you will borrow thousand of dollars from them to get that education. You are left with huge debt to pay off again almost for the rest of your life.... CREDIT WHO THE HELL CAME UP WITH THIS SYSTEM??????
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