Debt Mentality

With 1 in 3 adults holding debt sent to collections, it is safe to say America suffers from a debt problem – though the root of the issue may be arguable.

According to a July study by nonprofit social and economic policy research firm Urban Institute, 77 million Americans have debt in collections.

Bob Hammerschmidt, Springfield regional president for Kansas City-based Commerce Bancshares Inc. (Nasdaq: CBSH), said attitude is a prime factor when considering debt. Despite history’s portrayal of poorly managed debt, including the Great Depression in the 1930s and the most recent Great Recession of 2008, Americans have kept the same debt mentality they’ve always had, he said.

During the next few years, the Congressional Budget Office predicts business investment will rise. The resulting income increase would give consumers more buying power, according to the February report. However, Hammerschmidt said without an attitude adjustment, America could find itself back in a 2008 economy.

“The debt mentality is as bad as pre-recession and could get worse,” Hammerschmidt said via email. “Millennials are not saving enough, and they are getting hooked like previous generations.”

Randall Bettis, chief lending officer and senior vice president of lending services at BluCurrent Credit Union, said people often look at debt from the wrong perspective, giving them a skewed debt mentality.

“We are so payment conscious as opposed to balance conscious,” Bettis said. “If we consider only the payment, we are looking at the wrong side of it.”

That mentality can lead debtors into potential peril, stacking loans based on payment and not considering the overall cost.

Hammerschmidt said there is too much outstanding consumer debt – even after the deleveraging from 2007-14 – and America’s debt mentality needs a little financial discipline.

What’s in your wallet?
Hammerschmidt said consumers’ financial discipline and management directly impacts the success of businesses.

“A business entity cannot survive without fiscal discipline, or it would become insolvent or bankrupt,” Hammerschmidt said, noting financial discipline simply means living within means. “If people are paying too much on credit card payments and car payments, they cannot spend.

“Businesses are dependent upon consumption.”

According to nonprofit business research group The Conference Board, consumer confidence is at 90.9 percent, the highest it’s been since 2007.

“We need consumers to buy products,” Bettis said. “It keeps businesses going and the economy running, but the best case scenario is for every consumer to be able to walk in and purchase anything with cash.”

Hammerschmidt said that scenario isn’t on any near horizon, citing the statistic that 54 percent of the American workforce ages 20 to 65 don’t have at least $25,000 saved for retirement – a recommended minimum according to the Boston College Center for Retirement Research. The study found 43 percent didn’t even have $10,000 saved for retirement.  Tracey Blaue, director of education at Consumer Credit Counseling Service, said lack of retirement savings is a key problem she addresses with clients.

Last week, a 74-year-old woman walked through her doors in tears, Blaue said. After her client’s significant other’s health took a turn for the worse, medical bills piled up and income was reduced to a single $800 monthly social security check.

“She’s looking to be homeless in about a month,” Blaue said, noting she never planned for retirement or built her savings. “You need to plan throughout your life.

“I don’t think people are being proactive.”

Blaue doesn’t see as many business owners in her office, but those she does are typically swimming in credit card debt after using the plastic to start or maintain their company. She again preaches debt management, noting business owners look too much at overall expense, rather than how to manage their debts in the immediate here and now.

For those struggling with debt, Hammerschmidt said building enough savings for retirement and being financially disciplined go a long way toward preventing a financial crisis. The general rule of thumb is a person will need 80 percent of his or her pre-retirement income after retirement, though it is a broad generalization, Hammerschmidt said.

For example, if a couple makes $100,000 a year, in theory they should be able to retire on $80,000 a year, though amounts vary depending on individual needs.

In addition to retirement, individuals should have some savings for long-term care and emergencies.

Types of debt
According to the Urban Institute study, debt in collections – a bill past due by more than 180 days – involves non-mortgage bills, including medical and utility expenses and credit card balances.

Delinquency at BluCurrent is at 0.12 percent, a figure Bettis said is healthy compared to its 2008 figure of 2 percent, something he noted was unprecedented but fitting with the financial crisis of the time.

“As delinquency increases, consumer and creditor confidence drops,” he said.

Blaue and Bettis have noticed a steady uptick in consumer medical and utility debt, potentially a result of rising prices for Show-Me State residents.

“The rate of inflation increases more than the rate of pay,” Blaue said. “So, there is this gap with people who are trying to live within their means. They’re not living outside their means really; they just can’t maintain the same standard of living they are accustomed to.”

In addition, Blaue said more people who make good money are paying several thousands of dollars out of pocket for minor surgeries, a scenario she predicts will only worsen as time and health care reform progress.

Gov. Jay Nixon vetoed a bill last month that would allow payday lenders to charge 912.5 percent interest on a 14-day loan and allow borrowers to take out multiple loans from multiple payday lenders, according to a news release.

Bettis said payday loans are just alternate ways for consumers to obtain financial services when they feel they have no other place to obtain a loan.

“This could be due to credit difficulties or learned patterns,” Bettis said. “We try to help members be wise about their lending choices.”

Making a change
“Instead of the 3 percent economic growth we were used to, we must get used to 2 percent growth, which is not bad, just the new normal,” Hammerschmidt said. “We have greed and bad habits to overcome – greed from the predatory lenders, as well as consumers who are accustomed to living beyond their means, including the higher income earners and those who think the government should pay for everything.

“As a society, we do not take a long-term view of our financial situation, individually or as a country.”

Bettis agrees consumers often are led down the wrong path when it comes to debt and businesses need to make changes, too. He said many businesses perpetuate the wrong kind of debt mentality, one of being payment conscious rather than balance conscious.

“That’s not good for the economy,” he said. “Consumers must feel confident about tomorrow’s income in order for goods and services to be utilized, which in turn helps the economy.”

When the debt begins to mount, Blaue said businesses and individuals should create a plan and stick to it.

“We’re in a society of ‘I see it. I want it. I’m going to get it and figure out how to pay later,’” she said, adding technology can be an asset to borrowers and lenders alike.

Technology itself has been a cherry on top of the debt sundae, becoming more of a necessity in the eyes of Americans.

“This generation is the first generation that has never had to be without a cellphone or other modern conveniences,” Bettis said. “It used to be a luxury; now it’s a requirement. At the same time, we don’t want to feel like we are downgrading and often rationalize a want into a need.”