Why Debt Management Sounds Strange

The idea of managing your debt rather than eradicating it is foreign to many people. If you have Depression-era parents or grandparents, you may have heard their tales of once-wealthy folks losing everything because of debt. In those days, lenders could “call” loans at will, demanding immediate repayment. As the economy crashed, many did so, meaning that people who had mortgages could face losing their home even if their payments were current.

But the roots of our unease go even deeper. 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 U.S. until 1841, and bankruptcy continued to carry a huge stigma until the end of the 20th 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 home equity loans has tripled since 1990.

• Household debt burdens have risen to near-record highs, with 20% more of our disposable incomes devoted to debt than was the case 20 years ago.

• The amount and length of the typical car loan continues to increase. In the 1980s, the typical car loan lasted three years; today, 84% of all new car loans last more than four years.

• The average homeowner's equity represents 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 are putting down less and draining the value from their homes through home equity lending at a furious pace.

It's obvious that some people are overdosing on all this debt. Bankruptcy filings for individuals set new records in 2001, 2002, and 2003 before declining slightly in 2004. Foreclosures in 2003 reached their highest level in 30 years—a remarkable feat considering that foreclosures don't usually rise in a hot real estate market when most homeowners can sell their homes quickly. This indicates that a rising number of homeowners may owe more on their homes than the houses are worth.

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 $650 a year on average—money that, if invested instead, could grow to $170,000 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.