How Americans Get Out of Credit Card Debt

http://blog.readyforzero.com/2011/02/04/how-americans-get-out-of-credit-card-debt/

by innovate • 15 years ago

88 122 15 years ago

blog.readyforzero.com

kirpekar2• 15 years ago

"How Americans get out of credit card debt."

Don't most of them just pay it off? Sure takes a long time, but eventually don't most people pay what they owe?

BTW, there are only about 1.5Million bankruptcies in the US every year ... that's <1% of borrowers. So I wouldn't use it as the first kind of "traditional option".

rbranson• 15 years ago

It's kind of misleading to say that it's "only" 1% of borrowers file, because the scope of time is focused on one year, but not only do borrowers have a much larger average lifetime, but the impacts of bankruptcy last 10 years. If we say that the borrower pool stays fairly static over a 10 year period, that means really you're talking about AT LEAST 15% of borrowers are filing bankruptcy.

Retric3• 15 years ago

Many people also die with debt. I suspect less than 50% of people ever get back to zero after gaining significant amounts of debt.

ithayer4• 15 years ago

Hey there, thanks for the comment!

You are absolutely right that there were about 1.5M bankruptcy filings last year [this number is growing (1)]. Note that we haven't made any claims about the ordering on the graphic, but bankruptcy is an option which is often under-considered, because people are scared of it, and driven by FUD to pursue other options which often have lower success rates.

Rod and I have learned a tremendous amount about debt since founding this company. We have heard every possible misconception from people who are not in debt, such as

- "people don't care about paying debt off as much as weight loss because it's not visible" - "only dumb people get in debt" - "people should just stop shopping and pay off their cards"

The list goes on. What we have learned from speaking with dozens (now probably hundreds) is that there is no "typical" debtor. People that have reached out to us vary in age, sex, location, education level, stress level, income, employment, height, weight, hacker cred, skin color, and so on. The number of people in this situation in the US number in the millions. The statement "Don't most of them just pay it off" trivializes situational problems which are extremely diverse and complex. And "take a long time" it does - people that are either not financially educated or unable to pay off their debt can live in a steady state of repayment, paying a perpetual existence tax to banks. This should not be the state of the world!

(1) http://www.uscourts.gov/News/NewsView/10-11-08/Bankruptcy_Fi...

dstorrs• 15 years ago

If the debtor pool varies as widely as you claim, that reinforces something I've been wondering for a while:

Is it true that Americans are in debt because they are fiscally irresponsible, or is it because the playing field is tilted?

It is hard for me to believe that 33% of all Americans can't grasp the idea of "spend less than you make". Sure, a lot of it is consumer culture / media pressure, etc. But other countries have the same sort of culture and lack our level of credit card debt. Could it be that the field is tilted -- e.g. wages are simply at a level that does not allow the average person to save much even if they try, meaning that as soon as they hit a financial bump (job loss, non-insured surgery, car repair) they are in debt and the interest rates on the card spiral?

This is not a conspiracy theory -- I don't think there is a literal collection of people in a room saying "how do we stick it to them this week?" -- but I do think that many economic actors (credit card companies, credit bureaus, major retail stores, etc) act in their own self-interest to continue this situation.

I've seen bits and pieces that support this theory, but I lack the economic and political background to tell if this is right or not. Can anyone point me at good sources?

contagionhealth• 15 years ago

Wondering how many people use the consolidators who promise to manage down your debt by acting as midddlemen between you and collectors? What advantages (if any) does Ready for Zero offer over this method?

It took me 11 years to pay off 2 credit cards, and I'm still petrified to go into CC debt again. Will Ready for Zero also eventually offer planning tools for saving up for a big ticket item like a new MacBook Air so that I don't have to pull out a CC to purchase it?

scottkrager• 15 years ago

Try something like: http://www.smartypig.com (online savings accounts goal oriented) or http://www.mint.com (nice goals feature)

innovate4• 15 years ago

Today, RFZ is a do it yourself type of tool. So it is a different option altogether than debt consolidation but we did recently announce a partnership with Lending Club that allows us to consolidate people's high interest debts when and if it makes sense (not always the best option).

Planning tools are definitely in the works. We do help you understand the 'true cost' of items purchased on your credit cards; the interest and fees can be sneaky.

jarin2• 15 years ago

I love this idea, but I've been getting "We're sorry, our server is under heavy load. Please try again." during the verify phase for the last few days.

joezydeco• 15 years ago

I just got a beta code the other day after signing up months ago. Must be another marketing push.

ithayer4• 15 years ago

Thanks for checking us out - I'm really sorry about that. We are dealing with issues with some of our backend service providers. One of the difficulties of a financial site such as this is that the data which comes back is not very well normalized nor homogeneous, and we are seeing issues and response types which we have never seen before. Please send an email to support@readyforzero.com and we will track your issue. Thanks guys!

jarin2• 15 years ago

Sent! Let me know if I can help in any way.

StavrosK5• 15 years ago

What happened to "stop buying things you don't need"? I had a friend tell me he was considering a consumer loan because repaying his other loans didn't leave him with enough money.

I swear, it's as if people have never seen money before.

randrews2• 15 years ago

You can buy things you don't need, and you can buy things with money you don't have, but doing both at the same time is a really bad idea.

StavrosK5• 15 years ago

Ah, yes. That's what I meant, good catch.

Retric3• 15 years ago

The most useful way of thinking of CC debt is how much it INCREASES THE PRICE of what you buy.

That nice lunch might cost 20$ if you paid cash, but use your CC and it's really 20$ + the interest you are going to pay. If it's going to take you 4 years to pay off your 20% APR CC debt then that 20$ lunch is really 41$ 50c.

PS: That is not to say paying cash for lunch changes the numbers when you are in debt; CC increases the cost of "everything" you buy without exception.

joe_the_user2• 15 years ago

By say, taking out student loans?

Considering that this is pretty much the primary way that education is paid for these days, simply repeating "debt is a bad idea" hardly seems adequate.

(and I am personally happy to be debt-free but I can see why my indebted friends made the choices they did, however badly they may have worked out).

phugoid• 15 years ago

Though you're being rather flippant, I agree this is the key.

When there's a mountain of debt before you, the little spending decisions you make today seem to have no consequence on your fate. The cappuccino and Wired magazine that you buy on the way to work are of no consequence compared to all the money you owe.

Clearing debt can feel like digging at that mountain with a dessert spoon.

StavrosK5• 15 years ago

While you're heaping more things on it with a tablespoon.

jhamburger• 15 years ago

> Clearing debt can feel like digging at that mountain with a dessert spoon.

Right, and the prize for those who have the discipline and patience to finish? nothing. (well, nothing tangible anyway)

It reminds me of the "Bee Sting Theory" article (http://news.ycombinator.com/item?id=1467832). We are conditioned to view our finances in a competitive way, as a measure of our social value...and people deep into debt feel like they are so far behind their peers financially that they can't ever catch up anyway- so rather than futily trying, they cheat and try to buy the status symbols on credit instead. Stupid yes, but easy to understand on a psychological level.

noodle2• 15 years ago

relevant video: http://www.hulu.com/watch/1389/saturday-night-live-dont-buy-...

mattm3• 15 years ago

Or http://vimeo.com/3993848 for people outside the US

lutorm6• 15 years ago

Elizabeth Warren said that in their bankruptcy study, the vast majority of people who filed for bankruptcy didn't do it because they "bought things they didn't need". They did it because they overextended themselves to get a house in a good school district and then one of them lost their job or they had a medical emergency.

It's easy to paint those people as irresponsible, but according to her, it's very far from the truth in most cases.

joubert3• 15 years ago

"overextending" oneself, especially if you have dependents, is irresponsible.

nostrademons8• 15 years ago

I remember a study on general aviation plane crashes. They found that very few plane crashes came about because the pilot made a single, obvious mistake. Instead, the common pattern was a series of missteps, each so small that you couldn't properly call it a "mistake" in and of itself, the pilot was just cutting corners on the recommended safety margin. And then something happened that was out of the pilot's control, like bad weather or distraction or mechanical failure. Because the safety precautions that make it normally possible to recover from these events weren't followed, this resulted in a crash instead of merely a nerve-wracking landing.

I think the same thing happens with finance. If you look at the proximate cause of bankruptcy, it's almost always that somebody has a health emergency or a death in the family or loses their job. But many people have health emergencies, deaths in the family, and stints of unemployment without going into bankruptcy. And the reason why is the same thing Benjamin Graham and Warren Buffett have been espousing in investing for years: Margin of Safety.

If you always live on the edge, then it's a given that sometime you're going to fall off. Hold back 6-12 months reserve of salary, and suddenly unemployment doesn't look so scary. Health insurance makes a sudden medical emergency not quite so scary. Have $10-20K in the bank, and you don't need to worry that totaling your car is going to send you into crippling debt.

The irresponsible part is not that these people got sick or lost their job, it's that they didn't prepare for contingencies where they would get sick and lose their job. There's this culture in America where as soon as you start earning more money, you have to spend it on something, otherwise you're wasting it. But there's a tension between resiliency and efficiency, and if you're always being perfectly efficient, things tend to go very wrong when they go wrong. Make your bargains accordingly.

giardini• 15 years ago

tutorm states:

"They did it because they overextended themselves to get a house in a good school district "

That cannot be true. Furthermore you are taking her too literally and/or misunderstanding her intent. What she actually said was ( http://www.guernicamag.com/interviews/1485/generation_gap/ ):

“Families with children are tightening the belt one more notch,” she says, “are working extra hours, are sending both people into the workforce, to try to get into the best possible school district for their children.” But she adds one key, and very humane, caveat: “Families are in financial trouble, not because they’re irresponsible but because they’re too responsible.”

Warren is of course sympathetic, but she is obviously using the "search for a good school district" as only one example of how families are "too responsible".

Not that I believe Warren's last sentence is correct: my simpler and less charitable framing of the facts is that people simply bought homes that they could not afford.

yummyfajitas4• 15 years ago

No, her study didn't show that. Her study does not address causality at all.

# bankruptcies caused by a medical emergency = # of bankruptcies x [P(bankruptcy | medical event) - P(bankruptcy | no medical event)] x P(medical event)

Warren's study only measures P(medical event | bankruptcy). A bunch of innumerate reporters drew the same conclusion you did (admittedly, with help from Warren's confusing language), but that just shows the media is stupid.

Here is the study: http://www.scribd.com/doc/16155232/Bankruptcy-2009

PonyGumbo• 15 years ago

It's really much more complicated than this. There are a lot of people in this country who live paycheck to paycheck. Some of those people got there by living irresponsibly, and some didn't. When you're living paycheck to paycheck and an emergency comes up, you use whatever means you have available to get through it. I've certainly been in situations where I've had major unexpected expenses (medical, auto, home, business, etc) that had to be covered, and the only option was to put it on a credit card and hope I could pay it off later.

StavrosK5• 15 years ago

Definitely, but I don't think that's how the majority of people get into debt. My cousin can't make ends meet (he has a deficit of 100 EUR/mo) but he won't quit smoking and he just got a ceiling mural painted. When I asked him why he did it, since it set him back two months, he said "I didn't realise until after the guy had started painting".

nostrademons8• 15 years ago

I can understand living paycheck-to-paycheck if you're making $20K/year.

I can't understand living paycheck-to-paycheck if you're making $100K/year, and yet many people seem to do that. Why not live like someone who makes $60K/year, which is a perfectly adequate lifestyle, and bank the rest for emergencies?

consultutah• 15 years ago

Your comment reminded me of this SNL skit: http://www.hulu.com/watch/1389/saturday-night-live-dont-buy-...

elvirs• 15 years ago

as long as there is money in society there always will be dept. if consumers pay off all their dept on credit cards. if homeowners pay off all their mortgage dept for property. if all small businesses pay off their dept. if all institutions pay off their dept. if all banks pay off their dept to investors, foundations, etc. if all states pay off their dept to banks, IMF and other organizations.

in other words, if every single individual or organization pays of their dept there wont be a single dollar bill in circulation which means an end to our current system, which is something most people do not want to happen (no matter how broken and inefficient it is)

geuis2• 15 years ago

So my question is what about people that aren't in debt, but need help improving their credit score? I had a lot of debt from about 5-10 years ago and it killed my credit score. The debt has all been paid off for a few years, I haven't had credit cards in years, and I still have a few notices from closed accounts that won't fall off for a few years.

So I'm currently doing what I can to remove the closed notices and have had some minor success. But a lot of people don't know the right things to do to improve their scores.

Having a service that tracks the 3 credit bureaus and provides guidance on steps to take to bring your score up would be mighty useful.

chrisduesing• 15 years ago

Once you hit the 7 year mark those late payments fall off your record. Just keeping your current bills paid on time is probably the best thing you can do if you already have several years without any problems.

orijing• 15 years ago

> I haven't had credit cards in years

That raises flags for me, because as far as I know from what I've read, some of the key components of your credit score are 1. length of credit history (i.e. if the average age of your open credit lines is 0, then that's bad) and 2. credit limit (if you have no credit cards, you have no credit.

Certainly having no debt helps, but many of the other things hurt more than they help.

lionhearted• 15 years ago

Go to your bank and ask about a secured loan. Basically, you put money in a CD and get 2% or whatever. The CD sits at the bank. You then get a loan for the same amount as the CD at 3% or so.

They've got your money in the bank, so it's no risk for them. You put the loan on auto-pay, you lose 1% per year to do this, but you get 12 of these kinds of transaction credits on your account which is good because they count differently than credit card.

I did it with $1100 and it cost me $10 or $15 or whatever, but I went from not eligible for a credit card with a limit over $250 to getting an uncapped charge card with good rewards in 12 months, which was very helpful in business. I don't know about getting the bad transactions off, but getting good ones on is important too. I don't know what the lowest amount you can do it with is, but I did it with two loans: one $1000 and one $100, and it worked well.

geuis2• 15 years ago

I've also heard this before but wasn't sure about the details. Thanks for stating this.

arghnoname2• 15 years ago

I fell onto some hard times about ten years ago. Eventually I was able to pay the debt off but my credit was in the toilet for years. I went from a credit score of 530 to 600 and then it just sat there...and sat there..and sat there for a few years until the magic date passed where crap fell off and it jumped to 750.

The other lines of credit people are mentioning might be helpful, but in my case I just had to be patient. If I can manage to never take out a loan again in my life (it's been ~10 years) I'd love that. Debt sucks.

kirpekar2• 15 years ago

In the context of getting out of debt: Is anyone a Dave Ramsey listener here? I've been an avid listener for a few years now. I recommend his podcast to everyone -- not only for the financial advice, but also for the cultural education about what America really is.

mattm3• 15 years ago

I listened to him while paying off my student loans. A bit repetitive but very motivational and encouraging.

ams6110• 15 years ago

I like his debt snowball approach. I don't have a debt problem (and plan to never have, but crises happen). The way I understand it, you pay off your smallest debt by whatever means necessary, make minimum payments on everything else. Then you take what you were paying on that debt, and apply it to the next. Over time you are eliminating debt and applying all the money you spent on the eliminated debt towards the next debt. So you start paying off faster as you go. At least that's how I think the plan works.

Teckla• 15 years ago

The fastest way to pay off debt is to pay off the highest interest rate debt first, then the next highest interest rate debt, then the next highest interest rate debt, etc.

The debt snowball approach isn't the fastest approach, but the theory is that it has a strong psychological impact: By paying off your smallest debts first, you see forward progress more clearly, which motivates and energizes you to keep going.

Another good psychological trick is to have only one credit card. Then, when you get the bill each month, you can clearly see how much you've spent. The single big statement is scarier than having lots of little statements, and leads people to spend less money unnecessarily.

noodle2• 15 years ago

my mother listens to him a lot, so i've heard him quite a lot. his advice is good, of course, but i find it interesting that every program is the same thing over and over, like its a reaffirmation mantra that people need to hear in order to successfully not spend the money they don't have, or how to deal with it when they forget they're not supposed to.

BlazingFrog• 15 years ago

The infographic reads that 1/3 of Americans have credit card debt and further below that over 100 MM Americans carry a balance from month to month.

1. Isn't carrying a balance from month to month the definition of "credit card debt"?

2. As of July 2009, the US population is about 307 million people.

That would mean that virtually everybody with a credit card carries a balance from month to month. That's simply not true.

innovate4• 15 years ago

1/3 of Americans carry a balance from month to month (revolving) = ~100 million people; sorry layout is confusing but this is in fact correct. Of course, more than 100MM actually have at least one credit card but not all of them carry balances.

Simply put, way more than 100MM people have credit cards, only ~100MM or 1/3rd carry balances from month to month.

lurker17• 15 years ago

The way I read it, the two facts are redundant, they mean that virtually everybody with credit card debt carries a balance from month to month. That's tautologically true.

I would guess that more than 1/3 of Americans have a credit. card account (not necessarily debt).

ithayer4• 15 years ago

The most recent Survey of Consumer Payment Choice estimates that there are 178M card holders. The 2009 Survey of Consumer Finances (2) estimates that percentage of card holders of "bank-type" (eg: not Macy's) cards that revolve balances is just under 50%. With store cards, this number is right around 100M.

(1) http://www.bos.frb.org/economic/ppdp/2009/ppdp0910.htm (2) www.federalreserve.gov/pubs/bulletin/2009/pdf/scf09.pdf

nhebb• 15 years ago

OT: A blog peeve of mine is when you read a blog and want to visit the home page but can't find the link. Out of years of systematic reflex, I clicked the logo in the upper left, only to get the blog home. After a little link hovering I discovered the "try it out" button goes to the home page, but to me that means sign up, not read more about it. If you're going to use your blog for marketing, make it really easy for visitors to visit the home page. Don't make me think!

efields• 15 years ago

I got my RFZ invite code the other day and took the 10 minutes it required to get my credit cards in the system and play with its tools.

I found it to be SO much simpler than Mint, which I've just ignored for more than a year now.

With RFZ, I can quickly see that if I stopped using my cards and paid X per month for 3 years, I'm out of debt and am only paying about 15% more over what I owe. Thats not so bad when you consider the alternatives.

Now, I think I underestimated what I can afford to pay, so hopefully I look at my bank account one day and see there's a few extra thousand that I don't need to save and can immediately put that on a card. Feels like I'll be better off much sooner than 3 years.

Mint can do this, I know, but again — the simplicity of the experience of RFZ is top notch.

innovate4• 15 years ago

Thanks. We would love to hear more about your experience as we continue to make improvements.

sudonim• 15 years ago

Ditto. I got my invite the other day. I like that it is one place focused on getting my debt down. I paid what felt like a bunch of money the other day, but on RFZ it's clear that it was a drop in the bucket of what I owe in total...

I second that. RFZ is top notch.

Edit: this thread reminded me to check if a trade cleared. Just paid another $800 towards credit card zero. Woot!

meterplech3• 15 years ago

Is their business model subscription based or recommendation (like Mint) based? I don't know if I would trust anything from a company like this if I was already in debt. Usually people already feel screwed over. They should really work on PR and branding so people feel like they can trust then.

innovate4• 15 years ago

Check out our FAQs and Privacy Policy, we try to address this and other issues there: https://www.readyforzero.com/overview/faqs https://www.readyforzero.com/overview/privacy

As a datapoint, since the public launch a few days ago we are already helping people track over $35M in credit card debts. We believe trust is earned not paid for.

meterplech3• 15 years ago

Nice- I should've looked. And, I appreciate the idea behind earned trust. Best of luck!

thompo2• 15 years ago

i rang up about 5k in credit card debt. six months ago, i decided to put my nose to the grindstone and get it done.

i paid my last $600 off this morning.

i stopped buying unnecessary shit, stopped eating out all the time, and most importantly, made payments -every- time i possibly could. if i opened my bank account online and had $400 left in checking, i'd put $250 into the card. if i had $200 left, i'd put $100. there are a whole boatload of $50 payments and many even smaller.

just start paying and don't stop until it's gone. pay your bills, stay fed, and whenever you have money left over, move it to your credit card. try to make a small payment every couple days. just focus on that damn number and make it smaller every single opportunity you have until it reads "0".

i also made enough during this period to pay for a trip to jamaica in cash. i only make $39,500 yearly so it's not like i'm hauling in bags of dough, but focusing on my credit card debt also had some interesting side effects - like learning money management and learning how to save WHILE paying down old debts.

it got to the point that i found more joy in moving $50 to my credit card than going out and dropping $50 on drinks over the weekend. it's funny, but all that stuff that i just 'had' to buy before ...... it turns out i didn't. imagine that.

TheAmazingIdiot2• 15 years ago

I'm sure you're up there with those who think that people who owe large sums of money should "just work harder" or "lay off alcohol and cigs".

I had a medical injury that has royally screwed up my life. I also HAD insurance, but starbucks switched insurance and I was now in preexisting condition hell. I had no money for a lawsuit, so I'm now 12k in the hole, along with basic living expenses that I had to cover while not being able to work. Its upwards of 20k and I have no way to pay it off.

So no. Quite many people in USA are just 1 accident away from ruin. I've seen it 3x before, and now with me. And there's not much at all that could be done.

sixtofour• 15 years ago

"Quite many people in USA are just 1 accident away from ruin."

I am without health insurance, and I find that I am very careful moving about in the world, for exactly that reason.

If I ever get in a major accident, I almost hope they can't revive me.

thompo2• 15 years ago

'I'm sure you're up there with those who think that people who owe large sums of money should "just work harder" or "lay off alcohol and cigs".'

You say I'm "up there" like I'm some sort of snooty asshole for working my face off for six months to pay off my debt. I have my vices (I love you, Mary Jane) and I still managed to afford them so make whatever assumptions you will about me, I just found it more gratifying to work on my debt rather than get canned every weekend (not at first, it took a few months to get to that point).

I feel for you in regards to your injury, but 20k is pretty damn far from insurmountable debt. If anything it sounds like you've given up on yourself, and that sucks because I've been there and it's a tough spot to break out of.

I worked my ass off for six months to pay off 5k - work your ass off for 24 months and you'll be well on your way to knocking down that 20k.

Oh.... and just work harder.

kevinpet• 15 years ago

They have a chart showing how people get out of debt, and the chart seriously does not include the option "pay your damn bills?"

I'm reminded of statistics saying that the average wedding costs $28k or whatever. The reality turns out to be something like "among weddings arranged by a professional wedding planner, the average cost is 28k".

I hope they aren't putting together a funding pitch equating the "1/3 of American's have credit card debt" with "1/3 of Americans have enough debt that they need outside help managing it" as this chart implies.

arghnoname2• 15 years ago

I've been in a situation where life sucked and racked up some debt and fouled up my credit, so I can sympathize to some extent, but what I thought was pretty bad debt (including student loans) was less than that 'average' wedding figure.

After spending a year or two putting all my extra income toward successfully retiring the debt, my future wife and I looked at engagement rings and weddings and thought, "this is crazy." She has no engagement ring (wedding band though) and we eloped, and we're just as married as my brother and he spent $30k.

I have a friend whose parents offered to give them money for a down payment or to pay for their wedding. They chose wedding.

What the hell people? It's one day. The wedding madness is just nuts. "Hey, we might want to buy a house and have kids soon. Let's spend all of that money we might need entertaining a gaggle of family and friends, half of whom each one of us doesn't particularly like."

iamchmod• 15 years ago

I wonder how many people that declare bankruptcy own a big flat screen TV with a DirectTV subscription with at least one premium package (Showtime, HBO, etc)?

pnathan• 15 years ago

Hi,

I don't have much CC debt right now, at all. What I do have is Student Debt, and bags of it.

I've rummaged through the relevant federal repayment and waiver options, and I don't see any efficient ways for a software engineer to deal with the debt except "push as much money at it as fast as possible". Loan management options seem to extend debt payments out to about 30-40 years, which generates some eye-hurtingly huge interest payments over time. (think 1.5x the original loan amount).

One of the nasty little twists in federal student loans is that bankruptcy won't affect them. They do have various deferment plans, but those can keep the interest ticking along, which can be harsh if loans are large.

So: my question is: does readyforzero.com have any plans to work on student loan debt in the future?

How Americans Get Out of Credit Card Debt

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