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This chapter is from the book

Why Debt Management Sounds Strange

Long before Ben Franklin opined, “So rather go to Bed supperless than rise in Debt,” Americans believed there is something shameful about owing money.

In colonial times, excessive debt was a crime that could land you in jail—where you would remain until you, or your family, somehow paid what you owed. More than a few people died of the rampant disease and terrible conditions that typified prisons of that era.

Debtors’ prisons weren’t outlawed in the United States until 1841, and bankruptcy continued to carry a huge stigma until the end of the twentieth century.

Of course, our cultural suspicion of debt hasn’t kept us from piling up mounds of it. If you know anything about debt in America, you probably know that we owe more than people in any other country, and our pile of IOUs just keeps growing:

  • The amount we owe on credit cards and other revolving lines of credit dropped sharply from its 2008 peak of $972 billion, as chastened consumers and lenders cut back. But the $803 billion we owed in mid-2012 is still more than twice as much as we owed in 1990, adjusting for inflation.
  • The amount and length of the typical car loan continues to increase. In the 1980s, the typical car loan lasted three or four years; today, the majority of all new car loans last more than four years. Some last eight or even nine years.
  • At the peak of the housing bubble, the average homeowner’s equity represented just 55% of the home’s value—down significantly from the 65–67% levels that were typical in the decades before 1990. What’s remarkable is that equity dropped even as home prices rose spectacularly, indicating that people were putting down less and draining the value from their homes through home equity lending at a furious pace.

It’s obvious that some people overdose on all this debt. About a million households file for bankruptcy protection each year. Foreclosures are still rampant, reflecting not just excessive borrowing but increased unemployment from the economic tailspin.

Even when people manage to make their payments, the price of debt can really add up over time. The typical homeowner will pay for her house two or three times over by the time she retires a 30-year mortgage. Carrying just $5,000 on your credit cards can cost you $750 a year on average—money that, if invested instead, could grow to $200,000 over your working life. Most people who buy new cars these days are “underwater” as soon as they drive off the lot. They will make payments for years before their car debt is less than what the car is worth.

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