Debtor’s Prison

I know pretty much most of the arguments about the “advantages” of home mortgages and mortgages on business property. I also know the greatly added costs caused by the interest on the repayments. Perhaps there is a rationalization for home mortgages and on business property, but I see no rationalization for accumulating credit card debt to buy “things.” Some people cannot help some of this debt, especially if the reason is to pay for unexpected and necessary medical costs or for an unforeseen or unplanned loss of a job, and these might have to be considered on a case-by-case basis. But taking on debt to make unnecessary purchases because you want to makes no sense to me and is something that I suggest should be avoided.

In a simplistic way, adding 30% annual interest to purchases that are repaid over time will pretty much almost double or even triple the cost of whatever you are buying. Is that $200.00 sweater you have to have worth the $400.00 or $600.00 you will eventually pay for it? Also, add the anxiety of worrying about what you owe and the time juggling your checkbook to make sure you make the right payments.

Because of my teaching at colleges, I know how students feel about the student loans they’ve accumulated. Some of this debt has been exacerbated by the interest rates they are being charged. Also, some of these students will not be able to pay this debt for at least 10 years after they start working.

All principal repayments and most interest are paid with after-tax dollars, raising the amounts you will need to earn to pay down your debt, further extending the period until you are out of your “self-created debtor’s prison.” If you are in a 30% tax bracket and pay $1,000.00 a year in credit card repayments plus $300.00 interest, you will need to work for and earn $1,857.00 to make that payment [70% of $1,857.00 = $1,300.00]. Stretching this out over a number of years could easily triple the cost of that goodie you had to buy by charging it to your credit card. For student loans, the interest rate is much lower, but the concept is the same. You will need to work for and earn much more than the payments you are making. Also, this is worse if your tax bracket is higher. Keep in mind that besides federal and state income tax, you are also paying the 7.65% employee’s share of the Social Security and Medicare tax, which is deducted from your salary. These numbers are illustrative and could vary based on repayment patterns, credit card rules and individual circumstances, but you should get the point of what I am saying.

If you are not in debt, then do not start running up credit card debt. If you will need to take on student loans to go to college, consider a lower priced school or a local two-year community college. Do what you can to reduce any debt. If it means going to a less prestigious university, consider if the added costs are worth the added debt. Another way to look at it is to consider the added value of the more prestigious school versus the added costs and prolonged period you will be in debt and the total amount you will need to earn to repay that loan.

I have some simple advice for those currently in debt. Stop buying and charging anything that you cannot fully pay for immediately when you get the bill. You can also consider spending less even when you have the money and use it to do what you can to accelerate paying down your debt. Another way is to consider if that new purchase is worth triple the selling price because that is what you will need to earn to pay for it.

This is a complicated situation and is not only financial. It also involves individual behavior and innate feelings that are way beyond anything I want to get involved in here. There is also much more to this than what I’ve written here. However, I hope that those in debt who read this get some sort of a wake-up call from what I have written. Do not imprison yourself with debt on unnecessary purchases.