I. Debt Perceptions – The Consumer Culture in America
To owe someone $8,000, for about $6,500 worth of stuff, and be enslaved to paying a small fee of it every month, for 15+ years is normal to most Americans. The average American household, according to many statistics, is over $8,000 (if not 9,000) just in credit card debt.
This doesn’t include the $200,000 house that you will pay approximately $303,000 with mortgage, or the $25,000 car you drive that will end up costing you closer to 30 after it is all said and done. Oh, and did I mention the $50 a month for the new furniture, $30 a month for the new computer, and the $15 a month for the new washer you had to buy because the old one unexpectedly broke down?
Such is the way of life for an average household. Enslaved, almost quite literally, to the monthly payment. A simple purchase transaction goes something like this:
Consumer: I’d like to buy this item.
Business: Great, how about we sell this to you at 28% interest?
Consumer: As long as the monthly payment is not more than $40 it’s ok!
It has gotten to the point now, that even experts differentiate now between “good” debt and “bad” debt. One article I came across said,
…experts say, your total monthly long-term debt payments, including your mortgage and credit cards, should not exceed 36 percent of your gross monthly income.
Hold on. That sounds nice, but let’s rephrase it. For every dollar you make (after taxes), you should keep only $0.64 for yourself, and pay $0.36 to the bank. That’s for your long term debts. As interest accumulates, is there any hope of ever paying it off? Of that 36 cents there is a good chance that 24 cents are going to interest/fees, meaning only 12 cents will actually go to the principal amount. That is for every dollar you earn. Put it another way, for every hour you work, 15 minutes of that hour are for the privilege of paying someone back more than they lent you, so you could enjoy something you cannot afford in the first place. And this is recommended by experts. Does anyone see anything wrong with this picture?
Did you know, that for every dollar a credit card company collects in principal, they collect $2 in interest/fees?
I remember a conversation I overheard between 2 people at work. One was mentioning how his family was doing Dave Ramsey’s debt snowball plan to get out of debt (a lot more on this later in the series), and the other person responded by saying, you mean completely out of debt? He said yes, and she said, “Why? It’s good to have some debt.”
If you watch TV, you cannot help but see this new Visa commercial where a person who is not paying with Visa is all of a sudden disrupting some kind of flow everyone else has going on – i.e. to pay with anything other than a credit card is now slow and uncool. This is the culture we have created. It was not terribly long ago that fast food chains did not accept credit cards, now they happily take any card you have, even for 99 cent chicken nuggets. Alhamdulillah, our halal meat store owners are still keeping it real though, with their hand written signs posted at the one cash register with a working credit card machine, “No Card for Less Than $10 Charge. Thanks You, Management.”
There is no concept of saving up and buying something on cash. In a world where installment plans are the bread and butter of a Sunday ad paper, people simply think that to purchase any item, it must be on credit or on payments. Car ads don’t even advertise the price anymore! New Accord, $199/month. Does anyone even care what the bottom line is on these items?
In fact, the consumer culture has made it ‘financially’ attractive to open a credit card account. Purchasing furniture? Put it on the store brand credit card, and save 10%! Do you buy gas? If so, then open up a British Petroleum credit card to get 5% back on your gas!! That’s right, to save 15 cents a gallon, you simply have to sign over your financial future. And don’t forget about the rewards!! If you spend $10,000 on your credit card, you can get a $75 gift card to Babies R Us or Banana Republic! It doesn’t take an MBA to figure out the faulty math here. They would not be offering these things if the vast majority of people did not end up paying significantly more than the ‘reward’ amount back in interest.
It is no wonder that this cycle has created an entire generation of paycheck-to-paycheck households. How much can you truly enjoy all this stuff when most of your paycheck is spent before you even receive it? Most of these households have no chance at ever establishing any kind of savings. If an emergency comes up, just add it to the (ever expanding) line of credit that you have. It’s no surprise that things like predatory lending (the practice of a lender deceptively convincing borrowers to agree to unfair and abusive loan terms, or systematically violating those terms in ways that make it difficult for the borrower to defend against) are on the rise. Some are faced with the choice of either payday loans, cash advances, loans based on car titles, or other such abusive practices in order to prevent defaulting on their credit cards, car payments, or worse, house payments. It should come as no shock then, that things like house foreclosures are on the rise.
This drive to attain material goods is causing families to lose their homes, declare bankruptcy, have their marriages split apart – all because of their debts. It is a vicious animal that does not get much attention. In the consumer culture we live in, credit is made out to be this great thing that allows you to get everything that you need easily and ‘affordably.’ In the next part of the series we will explore the Islamic view of having debts insha’Allah.
For a better picture of the ideas expressed here, I very highly recommend watching the movie Maxed Out, a documentary about the debt crisis in America. If you simply own a credit card or have ever contemplated having one, much less have one with money you owe on it, this is a must see.
Coming up next… What Islam says about debts.