Credit Basics
Tallying the true costs of debt
By Cheryl Allebrand • Bankrate.com
There's a financial side and a human side to debt.
The financial side is easy to quantify, and the numbers are huge. Americans are drowning in debt, carrying a record $972.5 billion in revolving charges at the end of 2007, according to data from the Federal Reserve.
"The average household has $11,000 to $12,000 in credit card debt," says Christopher Viale, president and chief executive officer of Cambridge Credit Counseling Corp. Those figures are diluted by those who don't hold any debt, he adds. Households that carry debt from month to month carry close to $17,000 of unsecured debt on average, he says.
One out of every five households is either behind on payments or over the limit on at least one account, he adds. "Up and down every street in America, you go to every fifth house and they're living in the penalty rate zone on credit cards."
To put things in perspective, he calculates that the interest and penalties alone on a debt of $17,000 totals $400 a month. "The first $400 they send doesn't pay down the $17,000," Viale says.
Beyond the numbers
On the human side, the consequences of debt are never isolated. As hard as we try to compartmentalize our problems, the lines often become blurred.
In one extreme example, a school bus driver had been driving up debt at home and hiding it from her husband. Finally she came in to meet with credit counselor Howard Dvorkin, founder of Consolidated Credit Counseling Services, bringing her husband along to get the bad news.
"Her husband is physically a very large man," Dvorkin remembers, "and it was obvious that he was getting mad. You try to smooth things over, but it was a very uncomfortable situation."
Flash forward a few months and Dvorkin sees her on TV: Bus driver arrested for robbing a bank. She pulled the bus right up to the door, jumped off, robbed the bank, hopped right back on the bus and drove off. "The pressures are tremendous in a family," he says.
Debt can have many ramifications in our daily lives.
Opportunity cost
Freshman year at college is a time of new experiences, including credit card offers. But the future is a lot to trade for free T-shirts and water bottles -- the freebies offered by lenders. Campus booths hawk easy credit and in no time many students receive bad marks on their credit scores before ever leaving university. In fact, debt rung up during college can cut an education short.
Even kids who make it to college on their parents' dime can easily throw their educations away unless they've learned how to handle credit. Lewis Mandell, Ph.D., a debt expert and finance professor at the University of Buffalo, sees a lot of students who are forced to drop out because they had not paid enough attention to how much debt they'd run up.
"A very large proportion of those who drop out for that reason never get back in," he says. "So you're condemning yourself to a life of underperforming your own ability." In finance jargon, it's called an opportunity cost. By not sticking with the curriculum and getting sidetracked by debt, many young people forgo the college diploma and the opportunities and higher earnings that come with it.
