This article first appeared in the St. Louis Beacon: July 8, 2008 - She is a 34-year-old married mother of two who is whittling away at $20,000 of debt – a saga she shares on her Web site www.paidtwice.com.
Jaimie of somewhere in Northeastern Indiana asked that we limit her identification – not because she is embarrassed to share her financial woes but because she wants to feel secure on the Internet. More than 1,500 people visit her site daily to read about her attempts to pay off the credit card debt and college student loans she and her husband accumulated after graduation.
The full title of Jaimie's blog is: "I've Paid For This Twice Already ... From Financial Imprisonment to Financial Independence, One Snowflake At A Time. This Is One Family's Story." This isn't complicated economics. The blog's "snowflake" philosophy for debt-reduction is a common-sense approach that she says has enabled her family to cut $16,000 from a $36,000 debt load.
How did this happen?
The roots of the mortgage crisis reach back to the 1980s, when looser credit encouraged families to spend rather than save. A booming real estate market masked the problem - but only temporarily.
While it can be argued that all levels of the lending industry played some part in the sub-prime mortgage collapse, economist William Emmons of the Federal Reserve Bank of St. Louis adds another factor: household financial behavior.
"Little amounts of money can have a maximum effect,'' she said in a phone interview with the Beacon.
Jaimie's strategy is to target one debt at a time with extra money she "finds," while staying current with other debt payments. She has sold items on eBay and craigslist, for example, putting the proceeds toward her debt. She has learned to shop frugally and keeps a budget for household expenses. If she manages to save a few dollars on groceries, she "snowflakes'' that amount toward her debt, rather than splurging on extras.
Battling consumer debt has become almost a subculture on the Internet, where Americans – often 30somethings with families – share their homegrown recipes for debt-reduction on Websites with names like "No Credit Needed," "Being Frugal," "Gather Little By Little" and "The Simple Dollar."
It is an uphill struggle for many who are living in the tomorrow of consumer debt -- an aftermath that some economists argue turned up the heat on the sub-prime mortgage meltdown that has 3 million Americans facing foreclosure.
How Much Do We Owe?
U.S. consumer credit increased by $7.8 billion in May to a total of $2.57 trillion, according to the Federal Reserve.
Have it all ... no waiting
For nonprofit housing agency counselors, such as Chris Krehmeyer of Beyond Housing, helping people save their homes from foreclosure often goes hand-in-hand with consumer education about credit, financing and budgets. Beyond Housing is one of five St. Louis nonprofit agencies pooling resources and staff to provide foreclosure counseling through the St. Louis Alliance for Homeownership Preservation.
Krehmeyer said an important step for the financially troubled is to come to grips with their spending: Do you know how much you spend a month on groceries or on cable TV? Does your air-conditioner have to run all day? Is your thermostat set at 72 when it could be 78?
Kremeyer believes American consumers have fallen victim to what he calls a "self-inflicted frenetic pace" that has us feeling too busy to keep track of our financial affairs. In addition, spending and paying our bills has become abstract, as more and more of it is done electronically. Out of sight, out of mind.
"How many people even keep their debit card receipts?" Krehmeyer said. "Do you even know how much you spend? Everything has become so easy for us, and we don't take the time to make sure we understand our financial well-being.''
With the ease of credit has come an acceptance of debt, he said.
"The message is that it's OK to take out debt. We have become very comfortable with debt across a wide spectrum: houses, vehicles, education, credit cards.We're OK with that. We promote that,'' Krehmeyer said. "On some modest levels, debt is fine. A little bit of debt to get through school is not a big deal. And you've got to have a car to get to work. And to own your piece of the American dream – that will appreciate in value in time. But we've not been able to put parameters around debt – to say that if we go past this number, it will be problematic.''
Krehmeyer points to the old financial adage – 28/38 – that used to be the standard for home financing. Home loans were limited to 28 percent of income, with a total of 38 percent going toward fixed debt. But that 28/38 formula went out the window in recent years, as some lenders wrote mortgages that were 40 percent or more of borrowers' incomes.
Krehmeyer said many homeowners today have no concept of their debt-to-income ratio.
"Probably 95 percent of folks in the St. Louis region couldn't tell you what that number is for themselves. It's so far out of our consciousness,'' he said.
Paper or plastic?
Jaimie, the paidtwice.com blogger, says she used to think of her credit limit as money to spend.
"If I didn't have $800 for a car repair I wouldn't think twice about using my credit card,'' she said.
College students, who are used to their parents managing their financial affairs, don't just magically know how to handle credit when they turn 18. That makes them prime targets for credit card companies, she said.
"The younger you are, the easier it is to not think of student loans and credit cards as real money,'' she said.
Leonard Green, a psychology professor at Washington University, says credit card companies are adept at taking advantage of human nature and, in particular, our lack of self-control.
"We frequently do something that is worse for us in the long run because it's an immediate gain in the short run,'' said Green, a specialist in behavioral economics.
That can include everything from smoking cigarettes to buying an expensive pair of shoes on credit.
"It's the immediacy of money vs. the delayed aspect of credit. If I have to pay right now, I might not buy it,'' Green said. "If it's cash I have to fork over, it's more real. If I use credit, I'm not depleting my cash reserve. There is no immediacy of paying.''
The same psychology holds true for mortgage companies that convince homebuyers to accept adjustable interest rates that are low now but will balloon sky-high in two years.
"It's not only that we don't want to wait, but with delay, the value of something decreases to us,'' Green said. "It has less value if we can't have it right now.''
At the same time, advances in technology have made credit easy to access, unlike the old days when using plastic money was a cumbersome process. Shoppers no longer wait for clerks to run their cards through clunky machines toi mprint thick receipts with multiple carbon copies or place calls for credit approval. It's swipe and go.
Green said credit card advertising plays on the ease of spending, delivering a message to consumers that using cash is slow – and a bad thing to do.
Forget the ads if you are having trouble keeping your credit card spending in line, Green says. When possible, take cash and only buy what you can pay for.
Green advises consumers to use the self-control that credit card companies would like us to forget. If you must use credit, take only one card with you when yo ushop so you won't be tempted to put impulse purchases on additionalc ards. Don't get 20 credit cards; use just one or two. And keep track of your spending.