<story><title>Why Don&apos;t People Manage Debt Better?</title><url>http://blogs.scientificamerican.com/mind-guest-blog/why-don-t-people-manage-debt-better/</url></story><parent_chain><item><author>bradleyjg</author><text>I don&amp;#x27;t think such an absolute position is warranted. It&amp;#x27;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.&lt;p&gt;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&amp;#x27;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&amp;#x27;ve been watching for a year already and owe $69. You&amp;#x27;ve essentially paid $72 for the privilege of getting the TV you wanted a year earlier.&lt;p&gt;Is that worth it? Well that depends on a lot of things, some of them intangible, but I wouldn&amp;#x27;t say it can&amp;#x27;t possibly make any sense. The sort of Puritan attitude towards consumption and debt may not be the worst attitude to have, at least for oneself. But when combined with evangelism it is pretty annoying.</text></item><item><author>imgabe</author><text>Anyone at a point where they are making monthly payments on multiple credit cards has already lost the debt game. People don&amp;#x27;t manage debt better because they have been marketed to and taught to use debt completely inappropriately.&lt;p&gt;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. As a consumer, a house may be a sensible use of debt. A reliable car needed to get to work may be a sensible use of debt. A student loan might as well. Carrying a balance on a credit card is almost never an appropriate use of debt.&lt;p&gt;Unfortunately, marketers have instead convinced consumers that debt is an easy way to buy things they can&amp;#x27;t afford and pay for it later. This is almost always a losing proposition for the consumer, who invariably ends up paying much more than they would have if they had just saved up and bought the thing in full up front. The way to sensibly manage this is to not fall into the trap in the first place.</text></item></parent_chain><comment><author>anexprogrammer</author><text>The old, and conveniently oft forgotten, advice applies: Never borrow against a depreciating asset.  If you need to clear down you may have a problem.  A job loss, recession, illness could all mean you want to clear the debt.  Selling the now second hand TV is not going to clear the debt.  Add in a few more debts justified thus and you have a bankruptcy or house loss on your hands.  Perhaps you can guarantee you will not get ill or lose your job during the loan?&lt;p&gt;So many of the people bitten hard by the 2008 recession applied logic such as yours, and often drew down on their mortgages (cheaper than credit card) to buy TVs, cars and holidays.&lt;p&gt;Borrowing against a growing asset is different.&lt;p&gt;I&amp;#x27;m a &amp;quot;reformed&amp;quot; credit card user.  I haven&amp;#x27;t borrowed for anything apart from the house in around 15 years.  It&amp;#x27;s not a problem, and the kids don&amp;#x27;t miss out on having too much stuff either!</text></comment>
<story><title>Why Don&apos;t People Manage Debt Better?</title><url>http://blogs.scientificamerican.com/mind-guest-blog/why-don-t-people-manage-debt-better/</url></story><parent_chain><item><author>bradleyjg</author><text>I don&amp;#x27;t think such an absolute position is warranted. It&amp;#x27;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.&lt;p&gt;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&amp;#x27;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&amp;#x27;ve been watching for a year already and owe $69. You&amp;#x27;ve essentially paid $72 for the privilege of getting the TV you wanted a year earlier.&lt;p&gt;Is that worth it? Well that depends on a lot of things, some of them intangible, but I wouldn&amp;#x27;t say it can&amp;#x27;t possibly make any sense. The sort of Puritan attitude towards consumption and debt may not be the worst attitude to have, at least for oneself. But when combined with evangelism it is pretty annoying.</text></item><item><author>imgabe</author><text>Anyone at a point where they are making monthly payments on multiple credit cards has already lost the debt game. People don&amp;#x27;t manage debt better because they have been marketed to and taught to use debt completely inappropriately.&lt;p&gt;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. As a consumer, a house may be a sensible use of debt. A reliable car needed to get to work may be a sensible use of debt. A student loan might as well. Carrying a balance on a credit card is almost never an appropriate use of debt.&lt;p&gt;Unfortunately, marketers have instead convinced consumers that debt is an easy way to buy things they can&amp;#x27;t afford and pay for it later. This is almost always a losing proposition for the consumer, who invariably ends up paying much more than they would have if they had just saved up and bought the thing in full up front. The way to sensibly manage this is to not fall into the trap in the first place.</text></item></parent_chain><comment><author>grecy</author><text>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&amp;#x2F;or stop going to work, or reduce work hours.&lt;p&gt;In scenario 2, you&amp;#x27;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.&lt;p&gt;Scenario 2 robs you of your choices, because you&amp;#x27;re making a promise of future labor. Scenario 1 leaves all your choices on the table.</text></comment>