Goodbye to Debt
The new American status symbol and how to achieve it
As a nation of overspenders, Americans have seldom been ones to delay gratification for deeper fulfillment. Olivia Mellan, a money psychotherapist and author of Overcoming Overspending (Walker, 1995, $12.95), suggests embracing a long-term goal, like sending a son or a daughter to a prestigious school. "What would you want the money for if you weren't wasting it away on gourmet coffee?" she asks. Moreover, doing something that satisfies you, such as volunteering or taking up a creative hobby, can help wean you from overspending.
Phil and Jean Houghton of Colorado Springs became debt free in 1995. That allowed Phil to give up a management job and go back to work in computer systems support, a step he never would have taken had he and Jean been in debt. He didn't take a pay cut, but he didn't get much of a raise the next year. ("It didn't make any difference because I was doing something I enjoyed much more," says Phil.) Now the Houghtons are finding unexpected advantages to being free of debt. Jean says she and Phil had the "power position" when bargaining with a car salesman because they were paying cash.
Meanwhile, thousands of people have wiped out their debts by filing for bankruptcy, a decision made easier when fewer people frown on it. Creditors, in fact, are concerned about bankruptcy's lessening stigma and are pushing legislation to tighten the law. Creditors say some people who file for bankruptcy under rules that allow them to wipe the slate clean are able to repay their debts and should be required to do so.
But consumer groups disagree, and they blame card issuers for the increase in bankruptcies. "Issuers should be more discriminating and responsible in their allocation of credit," says Stephen Brobeck, executive director of the Consumer Federation of America. He suggests that issuers deny credit to anyone whose credit-card debt is already 20 percent of his income. At the same time, Brobeck challenges consumers to rein in their spending. "We need for society to view substantial high-cost, short-term debt as foolish," says Brobeck.
Extra credit. Creditors don't think it's fair to impose arbitrary limits on consumers. "Consumers deserve to have access to credit and should have choice in how they want to use it," says Jim Chessen, chief economist at the American Bankers Association. "You don't want to bench the entire football team because one or two players missed curfew."
Consumer groups also admonish creditors for not being more straightforward with consumers. Carolyn Ramsey of Sumter, S.C., was stunned to learn a couple of years ago, after enrolling in a local personal-finance seminar, that she owed thousands of dollars on multiple credit cards: She simply hadn't realized that paying the minimums wouldn't ever get her out of debt. Ramsey, 77, works two part-time jobs to help pay off her debt.
Issuers aren't sitting on the sidelines; after all, delinquencies and bankruptcies mean less revenue. Many are using credit scoring (right) to identify borrowers at risk before an account goes delinquent and even potential bankrupts. Employers, too, are stepping in to help. Many are setting up financial-wellness programs; some are expanding retirement education to include all facets of personal finance.
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