Reasons for Debt...

BA-744

If people don't mind, I would be very grateful for any responses to this discussion about debt and its causes. By debt, I am excluding mortgages.

I am very interested in how people behave with money (a spin-off from studying a Economics degree) and I always wonder what makes people go into debt in order to spend?

A few decades ago, debt was viewed as shameful and still some people nowadays (including me) would never want to go into debt.

Why do people borrow money to spend on non-essential items, such as holidays or a brand new car or a new sofa? Is it pressure to keep up with the Joneses or does the media portray excessive consumption as the norm? Have the goalposts for consumption moved, compared to a generation ago? For instance, your parents may have been happy with a portable TV, a small Hillman Imp and holidays in the Lake District, but now we "need" widescreen TVs, Jeeps and holidays in Florida.

Any responses/comments would be most welcome.

[Deleted User]

Debt has many causes and not all of them are straightforward. Anything from a death in the family of the main earner, to a failure of a business.

It's how people deal with their financial responsibilities that matters. If people don't know their limitations and don't exercise control over their spending, they get into problems. Loans and credit cards can be a tempting way out.

Debt knows no social or class barriers. Rich people get into debt. They just take a bit longer to do so. But when they get there, it is just as spectacular, if not more so.

What I perceive as being different today, from even 10 years ago, is the live now and 'have it all now' ethos. This is encouraged by the lenders who are so 'in your face' with adverts and promotions for loans and credit.

Sky TV makes me sick with amount of loan adverts.- usually aimed at those already in trouble. Yet Sky TV happily screen them as they are being paid to do so.

Credit card companes keep increasing credit limits WITHOUT being asked to do so.

Does ANYONE bother to save up for anything these days or am I just being old fashioned? I've just saved up for a laptop - I suppose I could have bought it months ago on a credit card but that is just my personal preference.

I have to say that a large amount of the clients I used to see in the CAB were not casualties of unexpected events with debt as the fallout. They were profligate spenders who simply overspent. What compounded their situations was the greed of the lenders in terms of high interest rates pushing them even further into debt.

Debt does not have the stigma it once had. It's like throwing up in the street after a bellyfull of booze and a curry. It's the norm.

Society today worships at the tills of consumerism. Don't believe me? Why are the shops so crowded at Christmas and during the Sales the rest of the year? Why do people think they've got a bargain when they did not need the item in the first place?

It's nothing to do with keeping up with the Jones' - more like keeping up with the Beckhams. Many people are sad enough to try and emulate people like this without having the means to do so.

Unfortunately things can only get worse.

nh

My parents always looked down on debt but they always used their overdraft, which was paid off each month when dad got paid - then used up again during the month. My dad was a big fan of 0% cards as well - he taught me well!

When I went to uni I was encouraged to get a £2000 interest free overdraft (by my parents - they weren't prepared to pay for all my uni costs, and there weren't even fees then) and a student loan for the full amount (£3,500 over three years). It was just expected that I would earn enough after uni to pay these debts off. But when my first job paid me £11,500 (that's journalism for you!) and I bought a property, albeit for £21,500, straight away, the Barclaycard wasn't paid off that first month I moved into my flat (£800) which then accrued interest and as the costs of living alone hit home there was not much left over each month to pay off that £800. I should have lived at home a bit longer.

I transfered the debt onto a 0% card but the debt was eventually £5,000 but as I kept transferring it to 0% cards I wasn't too worried. Eventually I put it on 5.9% for life of balance from Barclaycard and paid it off. I have not got into debt since and will not. But I was lucky as I met a man with a good job and we moved in together, I sold the £21,500 flat for £38,500 and that provided us with some deposit for our new house and paid off some of my debts.

I think people get into debt because they think they can afford to. But I think you always overestimate how much money you will have spare to pay off debts. It is difficult to gauge how much you can borrow comfortably.

Joe_Bloggs

Nice replies by ice and nh.
@BA-744
This isn't some kind of exam essay scam is it ?
Since economics is an art rather than a science you may well get top marks by re-interpreting our thoughts in an imaginative manner.

I think the concept of debt is being forced down students throats by the ambitions of the government regarding academic student numbers.
If students primarily, and their parents have to pay then lets give oppertunities to students to experience the world of full paid work during the summer break to make up the deficit.

As it stands many financially poorer students have to work evenings and weekends allready, to support their academic ambitions at a cost to their course performance.

Debt is a government sponsored necessity for students driven by a treasury that wants to adopt the US model for university education.

tru

I think people get into debt because they think they can afford to. But I think you always overestimate how much money you will have spare to pay off debts.

Not us. We paid off 2 credit cards in full every month and were repaying a loan. We had spare money at the end of every month and I have always known how much money is in the bank to the penny. What threw us was when hubby's old boss made him redundant. We couldn't understand how his job was redundant when he was manager of a shop. Shops need someone in charge, right? There was even talk of us buying into the business. Two hours after he was made redundant, we found out that the business was on the verge on going into receivership. The owner had to give himself a job so if it did go into receivership, he would lose the business but keep his job. In order to do this he had to get rid of hubby >:(

Jeryth

I'm in debt because I got made redundant and moved house. After a three month period of illness, I got my dream job, albeit part time. I decided that I could live on the wages, but couldn't and still can't address the overdraft. The bank are happy with my finances though. I feel more ashamed of working part time, even though it's 29 hours over 5 days with 3 hours travelling each day - it doesn't feel like part time - but I don't even earn £10K. When people ask where I'm going this summer, I don't like to say that I can't afford holidays. I find that some people have no idea of cost and value. Even £22 for a haircut would take two months to save up for. And don't get me started on weddings! But I digress.......

tru

Jeryth, I dunno why you're ashamed. I bet there's not many people who can honestly say they've got their dream job ;D I can probably earn 3 times as much money as I am now, but I've just found my dream job too and I'm not giving it up for anything ;D

BA-744

"This isn't some kind of exam essay scam is it ?"

No, though I wish I had the internet when I was studying at university in the early 90s. This sort of website would have been very good for collecting anecdotal evidence.

Thanks for your replies everyone. When debt is forced upon students or people who are made redundant or ill, those are explainable and easily understandable paths into debt.

However, what I (and many others) find much harder to explain is why healthy, well-rounded people in good jobs, are very willing to go many thousands of pounds into debt for non-essential, material things.

I think Ice gave a good insight by wondering if people just don't bother to save for anything nowadays and want it NOW. What has caused this incredible lack of patience amongst people, compared to say the 1980s?

It is interesting that whilst many social commentators say that we are all middle class now, the "buy now, pay later" culture has always been historically associated with the working class. In the past, the middle classes made a virtue of saving money with one eye on the future - they were "future-centric" as sociologists would say.

Also, Ice said that society is now more interested in keeping up with the Beckhams, rather than the Joneses. Is this linked to a breakdown of community relations? We no longer interact as much with our neighbours & relatives, so our reference group becomes people who are in the national spotlight?

So many issues, so many questions!!

Jeryth

Troo - I sometimes feel ashamed because I have, in essence, chosen to earn very little, and not enough to pay off my overdraft. I'm not even a working mother. I just know that I would not find another job that I like so much. And they are very sympathetic to my bad back too, which means a lot to me, after being turned down for a job becuase of it.

Pal

BA-744. It would appear that your perspective on this is slightly wrong. I also come from an economics background, an art built around the model of rational behaviour. i.e. that people will always use the information available to them to reach the optimal decision to improve their own or their families wellbeing.

Unfortunately for economists, the world doesn't work like that, as people do not make decisions rationally, they make them emotionally. A classic example is the forum member ac, who, despite the evidence she sees every day (cancer patients), still chooses to smoke.

Taking on debt in order to fund a short term purchase is a way of meeting an emotional need at the expense of behaving rationally and saving up for it.

Personally I believe that "keeping up with the Joneses" is not an entirely accurate statement. Instead we are genetically programmed to try to "appear more successful than the Joneses".

As a result there is a tendency to spend money we do not have on things that make us look wealthy to those around us (for example, designer labelled T-shirts, new cars and so on). I assume that this is genetic behaviour designed to improve our chances of finding a good mate!

I think that the Beckhams simply provide a model for the type of goods people need buy to impress their neighbours (police sunglasses for example). They are walking advertising boards.

The irony is that all these symbols really do is prove that someone is capable of getting debt. They don't provide evidence of wealth at all, nor do they prove that the individual is capable of paying back the debt. As a result those who usually look the richest often are not. I know many millionairres whose mortgages, private school fees, trophy wives, car lease costs etc mean that they are technically fall less wealthy than I am, despite having a higher income.

Here is a good example to mull over. One of the most important considerations for people buying a house is what it looks like from the front, and people will pay far more for houses that look good from the road.

Why is that? How much time do people actually spend looking at the front of their own houses? Surely the inside is far more important? Is it simply to impress their visitors? How can taking on a larger debt just to impress other people possibly be a rational decision?

BA-744

Pal - some good points you make there. The major shortcoming of economics is assuming that all people are utility-maximisers and that they go about this in a rational manner.

However, you then pick up how people naturally are, by saying that we base our buying decisions emotionally, or that we are "we are genetically programmed to try to "appear more successful than the Joneses"." and that it is genetic behaviour to improve our mating chances.

But if it is all in our genes, how does this explain the complete sea-change in attitudes to debt and materialism over the past 2 or 3 decades? Why are our fellow humans in places like Germany and Japan perfectly happy to keep their money in savings accounts? Why can you go to Indian-origin households in the UK and most of the time, they will have tens of thousands of pounds sitting in the bank?

Surely, the answers are more rooted in culture than nature.