Climbing Out of Debt
Sunday, October 15, 2006
Our mistakes take many forms. Relationships. The dreaded foot in the mouth. Oh, and money. Like the time I found myself in line at my college's student union, waiting for a Western Union money transfer from my father.
A few hours before, the lights in my apartment had gone out. A few days before that, I got a certified letter from my landlord, who was not just saying hello. The problem: I had spent too much of my paycheck on beer and sandwiches at Jimmy John's and failed to account for essentials, such as the electric bill and the rent. I was flat broke.
I called my father and begged for help, telling him I needed lights to study, not to mention a place to study. After some grumbling, he wired $500 to the campus branch of Western Union. When I signed for the cash, the woman at the counter said it came with a message. Stripped of some colorful adjectives, my dad's message was clear: Learn how to manage your money!
That slip-up years ago certainly wasn't my last one involving money, and heeding my father's advice has occasionally been a struggle. But I draw comfort in knowing that I'm hardly alone when it comes to making financial blunders.
Now that we have become a nation of debtors, fixing our financial mistakes has become much harder. Collectively, we carry $11.8 trillion in household debt, including mortgages, car loans and other borrowing. About 75 percent of U.S. families have some sort of debt, but what makes financial planners nervous is the size of debt and how quickly it is growing. Credit card debt alone leaped to $1.8 trillion in 2005 from $69 billion in 1980, according to industry data.
As our borrowing creates more opportunities for error, large financial institutions are prepared to pounce on our smallest mistakes. Late-payment fees on credit cards now average $39, up from $13 a decade ago, according to a government survey released last week. And that's just for one missed monthly payment. A small string of errors can easily spiral out of control, as fees pile up and interest rates jump. For debtors in deeper trouble, a new law that took effect a year ago made filing for personal bankruptcy much harder and more expensive.
Financial planners and credit counselors say money mistakes come in all shapes: borrowing too much against the equity in our homes; buying a pricey house with risky financing; failing to buy enough health or property insurance; and (my favorite) spending beyond our means.
My college-era financial hole was relatively shallow, and my sympathetic father helped me out of it. But for many consumers, financial holes go much deeper, and the consequences of their miscues linger far longer. For these people, digging out requires more-drastic measures.
Addicted to Spending
Take, for instance, Brian Robinson, who works in advertising in New York. He stumbled because of what he later recognized was an addiction to spending borrowed money. His financial mistakes began when he was traveling the country as an independent contractor, lecturing on time management and customer service. He used his credit card to pay for each trip's expenses, typically $1,500, and was then reimbursed by his clients with a check. Or at least that was the idea.
The problem: He didn't apply the money from the check to his credit card bills. He spent the money on dating, dinners out, shopping. Eventually, he maxed out his credit cards, and his mom's, before his debt totaled $50,000. About $20,000 of that came from work-related expenses that he could have paid off had he not spent the reimbursement checks elsewhere. His mother, brother and sister eventually stopped speaking to him.
"A friend of mine finally told me I was like an alcoholic with credit cards," said Robinson, who is 40 and lives in Manhattan. "I agreed with him. I had a real problem. I had to get my sobriety back around numbers."
Robinson's financial epiphany may sound like a cliche, and perhaps it is. But debt-management experts and financial planners say that realizing you have made a major financial mistake is the initial step toward solving it.