Wednesday, March 05, 2008

Staying Afloat

Having been spending less time these days in the blogosphere, I've found more time to read hard copy and to watch the news. In so doing, I've noticed more than the usual numbers of stories about the financial difficulties of Americans.
Credit card companies are reporting that cardholders are charging — that is, borrowing money from credit card companies (banks or other financial institutions) — in order to pay for necessities such as groceries, utility bills, and even local taxes. Even those who may previously have paid off their credit-card debt during the thirty-day grace period with no interest (sometimes referred to as a "float"), are now carrying a balance from month to month — a practice that can easily lead to financial ruin. In addition, rather than limiting the use of credit cards to big purchases and vacation-travel protection, families are discovering the necessity of using plastic money to pay for their monthly financial obligations. Accordingly, as the commercial tells us, too many Americans are simply up to their eyeballs in debt.

Certainly, the subprime mortgage crisis is one of the causes of the fatal use of credit cards. In my view, however, other causes are significantly contributing to the financial meltdown that many families are now facing. Americans have developed a buy-now, pay-later mindset. Furthermore, during “better times,” when they were using credit cards to purchase such luxury items as HD plasma televisions and vacations in the Cayman Islands, many Americans failed to internalize the consequences of using a credit card that produces debt in the form of a short-term bank loan. Ultimately, deferred payments do, in time, become payable.

Interest rates on credit cards bear at least one resemblance to balloon payments on leased vehicles. Once a certain pay-less point has passed, those rates become unmanageable, largely because payments early on apply nothing or very little to the principal borrowed. At some point, the day will arrive when payments transform from inconvenient to impossible. In other words, the discretionary spending of disposable income morphs into incurring significant financial obligation.

No matter how frugally one lives, some financial expenditures are impossible to avoid. Emergencies do arise and usually at the worst possible moment. But Americans have discovered that once they reach the spending limitations of one credit card, they can simply get another one, and another, and another one. In the modern political lexicon, Americans fall prey to “predatory practices” of lending institutions, even when these citizens are “just asking for it.”

Apparently, most people don't understand that a house of cards is destined to collapse; it is never a matter of if — but when. High Debt, and its brother Unmanageable Debt, can easily lead to the collapse of a house of cards. And, as in "The Fall of the House of Usher," the consequences for irresponsible behavior are weighty.

But never fear. Another credit-card application will soon arrive in the mail.

(Further reading: "Inside the Mind of a Debtor Nation")

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posted by Always On Watch @ 3/05/2008 05:56:00 PM