Is addiction too strong a word for America's dependence on debt? Given that addiction means needing something so powerfully that it overwhelms rational thought, the description fits the borrowing habits of many Americans only too well.
Here are some facts about this borrowing addiction:
- In the 67 calendar years since World War II, U.S. consumer credit outstanding has decreased for just two years.
- Adjusted for inflation, U.S. consumer credit outstanding has increased by more than 3,000 percent during that period.
- This total debt now stands at about 2.8 trillion, or $11,547.51 for every adult in the United States.
- You regularly make only the minimum payment on your credit cards. Credit card companies allow their customers to make monthly payments that are only a small percentage of the debt outstanding. They're not doing it to be nice. Minimum payment amounts are designed to keep you borrowing money for as long as possible, so you pay the maximum amount of interest. If you think you are managing your credit card debt well simply because you routinely make the minimum payments, you are fooling yourself.
- You consider yourself skilled at juggling your credit card balances. Credit card companies facilitate this behavior by offering special rates on balance transfers. However, while reducing the interest you pay is a good move, balance transfers should be part of a strategy to pay down debt, not sustain it. It may be an especially false economy if you don't watch out for balance transfer fees.
- You are regularly rolling over loans. Loans are fine as temporary financial measures, but if borrowing becomes a permanent staple of your lifestyle, you'll never get around to saving any money.
- You always take the maximum term on loans. Consumers are typically presented with a choice of how long a loan's repayment term will be. Taking the longest term available may make your monthly payment lower, but it also means you will pay more interest over the life of the loan. Opting for shorter-term loans can help keep your borrowing in check.
- You borrow beyond the useful life of a purchase. Borrowing for a mortgage or a car generally makes sense because these are assets you will get to use for many years to come, so it makes sense to also take years to pay them off. However, the more you find yourself borrowing for things like vacations or consumer electronics that don't have such a long lifespan, the more you are building an unsustainable lifestyle.
To a large extent, historically low interest rates have encouraged people to become more addicted to borrowing. Ironically though, those same low interest rates make this an especially dangerous time to expand your borrowing habit -- it can mean that you are building a borrowing-dependent lifestyle that you won't be able to afford when rates rise to more normal levels.
As with any addiction, it is usually better to quit over-borrowing of your own accord, rather than wait for circumstances to force you to go cold turkey.