When I was young, people lived from paycheck to paycheck. Today, it seems like they live from credit card payment to credit card payment.
Most of us know that millions of Americans are deeply mired in credit card debt. Many financial experts have said repeatedly, "Get out your scissors and cut up your credit cards." While this may sound like good advice, to me it seems like a painful, short-sighted answer to a more complex problem.
That problem is a lack of financial education. Why don't we teach kids about money in school? Rich or poor, smart or not-so-smart, we all use money. Yet, while there are a few schools beginning to offer some financial education, it seems that most educators believe money isn't a subject worthy of the hallowed halls of our learning institutions.
A History of Credit
When I was a kid, there were no credit cards. Instead, retailers offered layaway plans. My mom would go to a store, such as a furniture outlet, choose the sofa she wanted, and put it on layaway. That meant she put a little money down to hold the sofa, and every payday she'd pay a little toward the purchase. When the sofa was paid for in full, she would bring it home.
At that time, stores also offered "buy now, pay later" plans. This meant my mom could buy the sofa, sign a payment agreement, and take the sofa home that day.
Today, while a few stores still offer such plans or even variations of them, most people simply put their purchases on a credit card. But credit has been a part of American life even before there were credit cards.
A Growth Industry
There are many reasons why credit cards have grown in popularity, including these:
Wall Street has turned debt into an asset.
Today, your friendly banker issues you a credit card. He then sells your debt to a Wall Street firm, which collects your monthly payments at high interest rates -- which is why it's an asset to them.
The minute a Wall Street firm purchases your debt, your bank no longer has it on its financial statement, which then allows the bank to look for more credit card customers. That's one reason why you get so many credit card offers.
The purchasing power of the dollar has dropped.
If you've followed these columns, you know that in 1971, President Nixon converted the U.S. dollar from money to a currency. That means the U.S. and other governments can print money faster than you can earn it -- or save it.
In terms of purchasing power, if you earned $50,000 in 1996, you would have to earn $100,000 in 2006 just to stay even. Many people aren't earning more even though prices are rising, so they make up the difference by using their credit cards for everyday purchases.
When wages go up, so do taxes.
Because the purchasing power of the dollar has dropped, many people work harder, ask for raises, or take on extra work (or a second job) to earn more money. And when they earn more money, they move into higher tax brackets.
Today, the alternative minimum tax (AMT) -- first levied in 1970 as a tax against the rich -- is penalizing the middle class. In many ways, the AMT is a form of double taxation. Many working people are now making more money but taking home less because they pay a higher percentage of taxes.
The cost of retirement has gone up.
When I was young, many people worked for a company with a pension plan that covered them for as long as they lived. If they didn't have a pension plan, they could count on Social Security and Medicare.
That's all changed. Today, millions of workers need to be able to afford their day-to-day living as well as put enough money aside for when they can no longer work.
I Love Credit Cards
Clearly, cutting up credit cards won't address these economic changes or solve America's debt problem.
In the real world, credit cards are essential. It would be extremely difficult to rent a car or make hotel and airline reservations without a credit card. It would also be tough to pick up the tab at a business lunch or shop online without a credit card.
Personally, I love my credit cards because of the financial freedom they allow me, and my life would come to a grinding halt without them.
Fight Debt with Debt
Whenever anyone asks me how to solve the credit card problem, I tell them to fight fire with fire -- and debt with debt. The way I solve my increasing needs for cash is to go deeper into debt -- good debt, not bad debt.
For example, I use debt -- which is essentially tax-free money -- to invest in real estate, which in turn increases my cash flow. Not only do I not pay taxes on my debt, I could also pay no taxes (or very little in taxes) on the income from the debt. Hence I earn more but pay less in taxes.
Obviously, in order to do this you need to know how to use debt wisely and responsibly, and must be able to find great investments that increase cash flow.
The Root of the Problem
Most financial experts will scoff at my "fight debt with debt" approach. They'll say my advice is based on flawed logic, and it may well be -- for most people. But I ask you to step back and take a look at the world of finance. As I stated earlier, Wall Street is able to take your debt and turn it into their asset. That's what financially smart people do, and it's one example of why rich people get richer.
Unfortunately, most people take bad debt and turn it into horrible debt. This is especially true of poor people and people with bad credit, who have access to only the worst forms of debt and pay the highest interest rates on it.
But their problem isn't credit cards -- it's a lack of financial know-how. And at the root of that lack of knowledge is our school system and its archaic curriculum, which is out of touch with the way people really live.
Clearly, advising people to cut up their credit cards won't solve the problem of excessive credit card debt. A pair of scissors won't make anyone financially smarter, but some financial education just might.