Saturday, September 22, 2007

Credit: The American Way – Part I

This is the first section of a series entitled “Credit: The American way”, which purpose is to discuss financial issues in society yesterday, today and tomorrow. This first increment of series will deal with personal debts, the increase thereof, and the issues that we face because of it.

Credit is an amazing thing. Without it what could you do? You would most likely not receive any secondary education, own a house, or even a car! Buying on credit has often been called “The American Way”, and is generously indulged in by virtually every man woman and child not just in America but in the world. It seems that the overall goal for many in life is to become “Debt Free”; to own your own house, vehicles, and have enough money left over to hold you over until you die. An interesting side note is that strangely enough after this seems to be achieved they go and sell their house and vehicles, buy a RV, play the tourists, and use their retirement money 10 years ahead of schedule.

It was not always so, or at least not to the extent that it is seen today. Not tot distantly in our past it was the common standard “not to buy anything you don't have the cash to pay for”, but in recent years as interest rates drifted to the lowest levels in decades, consumers responded by buying everything and anything they could on credit. This fed a healthy cycle of economic growth and a growing job market.

Although buying on credit has its obvious advantages, and is almost a necessity in this day and age, it poses several disadvantages, problems, and a great potential for disaster not only on a personal level but on a national and even international level. Let’s take a look at these issues now.

On a personal level there are some definite issues and some troubling statistics. About 43% of American families spend more than they earn each year, the average ratio for Income:Expenditures is 1:1.22, meaning that Americans spend about a dollar and a quarter for every dollar they earn. The average household carries some $8,000 in credit card debt alone not including mortgages, cars, etcetera, (2004 Study) this number is up from about the $3,000 in 1990 that’s a 167% increase in 14 years, if this percent increase continued as it has, by the time I am 60(18 now) the average debt would be over 22,000(though inflation is another issue)! For an $8,000 debt at a rate of 18% interest, it will take more than 25 years to repay and cost more than $37,260 on the credit card alone.

These debts are termed “Revolving” credit which most typically involves credit cards. It accounts for about 37% of overall personal debt (excluding housing). Revolving debt currently totals $735.3 billion in the U.S.; that's about 31% higher than it was only five years ago (2004 Study). Even more worrisome is that about 60% of active credit card accounts are not paid off monthly. The figure has more than doubled in a decade. In 2003, 1 out of every 73 households in America filed for bankruptcy, in this last decade personal bankruptcies, or those who are unable or to pay their creditors, has doubled! (Stats from 1994-2004)

About 63% of debt is “non-revolving" debt such as automobile loans, student loans, boats. mobile home/RV loans, and personal loans. Which work in fixed increments of payment, unfortunately many do not, or cannot, live up to these payments and either forgo the pending payment or take personal loans (revolving) out, which makes the debtor pay more money overall but in smaller increments over a longer space of time.

The largest debt that most people have, is of course housing. Where I live, near Vancouver, you would be hard pressed for find a lot of land for less than $250,000 in the city. Buying a house is a very significant investment, it has great potential financially, but it can also go the other way. Regardless of what does happen, buying a house is the number one expense for Americans, is used to secure loans and as such needs to be treated with great care, as if you cannot fill your commitment you might find yourself on the street.

The total average of personal debt in the United States is $120,000 (2004 Stat) per household; this includes Housing, Vehicles, Loans, and Credit Cards, to use the scientific term “The whole shebang”. Of this total 76% is result of housing. 12% is installments loans (Non-Revolving Debt), 6% other residential property, 3% Credit Card balances (generally Revolving Debt), 3% “Other”.

The actual reasons the Americans take out loans are as follows. 70% for housing, 8% for vehicles, 7% for other residential property, 6% for goods and services, 3% for investments, 3% for education, 2% for home improvements, and the other 1% for the infamous categorization of “Other”.

So the synopsis is the average person in America owes $120,000 in personal debt, while this in and of itself may not seem very significant to some, especially to those who live in city centers where house prices are outrageously high, we must also take into account that this is an average. At the moment the average age in the United States is 56.3 years old which means that the average person is at a point in life where they have lower debt and are preparing for retirement if not already retired. The largest bulk of the population of the United States was born between 1946 and ends in 1960 which makes the bulk of the population is 47 to 61 years old, which is again is an age of lowering debts and retirement. What does this mean? It means that the bulk of this average of $120,000 dollars is coming from the younger generation, so if we were to poll the working population the average would be much higher, and like our fathers we are relishing the joys of credit, pushing its limits, buying more and more on credit. This is causing an even more alarming effect then the high debts; it is causing the average debt to rise each year in astonishing leaps and bounds, it has doubled bankruptcy in the last 10 years, and shows no sign of slowing. Something has got to give! While I do not and cannot supply an overall remedy, the first step in healing is obviously knowledge, while the next logical step is to formulate a plan to control your own personal debt, and in turn educate and assist others.

These financial issues in the United States are rather reflective of the actual governments’ situation that these citizens belong to. In the next increment of “Credit: The American Way” I would like to look at debt on a bigger scale, and examine the troubling National and International debts, which a center of the United States of America, which are more significant, less controllable, and a serious problem that will have to be dealt with in the next few years.

1 comment:

heidi lou said...

I didn't read this. no offense,I'm just quite honestly very ok with being an American. :] anyway, My msn isn't working. check your email. I guess i'll go read this cause now I feel bad. Haha, have a good one.

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