The Psychology of Debt: What Are The Psychology of Debt

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The Psychology of Debt

Before tackling the rules of debit and how to win with credit it is important to

understand the psychology of debt. What are the motivations that lead to debt?

Why are some people consistently unable to manage debt? What is the

relationship between self-esteem and debt?

With nearly trillions in unpaid consumer debt, a million households filing for

bankruptcy each year (more or less, depending on the year), and a very low

the savings rate, why are we racking up debt like there is no tomorrow?

In my experience there are five types of borrower profiles:

• Wishers
• Wasters
• Wanters
• Whiners
• Winners

The first three profiles tend to overlap, as we’ll see. The last profile, the

winners, have either survived and moved past the difficulties of the first four

categories or were credit winners, to begin with. This book will teach you how to

be a credit winner.

Wishers – The Psychology of Debt

Wishers are credit optimists. They have the sunny perception that they deserve

the good things; that they are meant to keep up with the Joneses, and can easily

afford it all. In their happy dream world of credit optimism, they focus on the

monthly payments, not on the overall debt. They see a $20 payment here and a

$75 payment there as doable, never focusing on the thousands of dollars of

overall debt, at crushing interest rates, they have incurred. They are convinced

that they can easily pay the bills as they come due.

Such false perceptions of what can be managed are extremely problematic

during the Christmas spending season, especially with the sense that the bills are due next year. Wishers, as optimists, see a brighter next year for themselves, a

better job, with more income, and a future whereby all money issues will be

resolved.

Unfortunately, not all wishes come true.

Wasters- The Psychology of Debt

Wasters spend money as an escape. With low self-esteem issues, they use the money

to purchase things in order to feel better, relieve stress, and escape their

problems. In a society where massive and pervasive advertising can easily

manipulate behavior, there is nothing like the feel and sense of something new

(or so the advertisers would have you believe.) A new car or truck or television

or vacation can end the emptiness inside – for a time. When that empty feeling

returns there are still bills to pay.

Wasters, however, will continue spending. With a credit card industry that

encourages, indeed programs, people to buy now (for wasters – feel now) and

pay later, wasters will sign up for more credit. They will find themselves locked

into a life of revolving debt. With low self-esteem, they will more often declare

bankruptcy and they will more often go back to their unsuccessful money

management techniques of short-term retail relief and long-term debt woes.

Wanters – The Psychology of Debt

One of the more interesting studies in annuals of psychology is the Stanford

Marshmallow Study. Begun in the 1960s, it was conducted by Walter Mischel, a

Stanford University psychology researcher, and studied the importance of self-

discipline on future success.

The Psychology of Debt

A group of hungry 4-year-olds was offered a choice. They could have one

marshmallow now. But if they waited fifteen or twenty minutes while the

researcher ran an errand they could have two marshmallows.

A third of the children immediately ate the single marshmallow. While some

waited a little longer, and another third of the children waited for the full 15 to 20

minutes for the adult to return.

Later, when the children graduated from high school, a follow-up study

provided interesting information. The quick and single marshmallow eaters were

less self-confident and couldn’t put off immediate gratification to reach long-

term goals. Their impulses were lifelong, resulting in bad marriages, low job

satisfaction, and lower incomes. The resisters, who delayed immediate gratification to receive two

marshmallows, were more productive and positive in life. By being able to delay

gratification in pursuit of their goals they had higher incomes, more lasting

marriages, and better health.

The Psychology of Debt

The problem in our society is that immediate gratification is actively

encouraged. “Have it your way.” Eyeglasses – or whatever – in under an hour.

“Buy now, pay later.” These are just some of the constant messages we receive.

Is it any wonder that those with lower self-discipline are lured into the

indulgences of immediate gratification?

The wanters want it now and the credit industry caters to that desire. The

issue of paying for all of it later inevitably becomes a problem.

Whiners

Whiners will start to read this post and will give up because they decide it’s

too hard, or it won’t work, or the deck is stacked against them. They may read

lots and lots of information about credit and personal finance but instead of

taking action, they continue to spend their time focused on the negative. When a

solution or answer is presented to them, they will go into detail about what’s

wrong with it.

Whiners may rail against FICO, creditors, the banks – or all three. While

they may have legitimate concerns about the fairness of the credit system, they

spend all their time trying to fight the system, rather than working toward a

solution.

How CREDIT System Works in Banking | Finance? Read this post for more information about this topic

The Psychology of Debt

Winners

Believe it or not, for all the criticism of the credit industry we have just offered,

there is room for huge winnings to be realized using credit to your advantage.

The winners know this or have learned it through their own education.

Perhaps their parents imparted the knowledge, or they read Rich Dad/Poor Dad,

The Cash Flow Quadrant and similar posts. However the wisdom was arrived

at, the formula can be very rewarding. First some obvious truths:

1. Banks make money by lending money. That’s their business. We all know

that.

2. Banks can lose money by making loans to people or projects that will

never be paid back. Banks have to be careful. Some important lessons

have been learned from the financial crisis starting in 2008. Like all of us, too many bad debts and there’s trouble.

3. Banks like to make loans when they have security or collateral. If the loan

isn’t paid they want to latch onto something tangible and real to secure

their repayment. Banks, like all of us, have to be careful in properly

valuing their security interest.

Given these obvious truths, there is one additional obvious truth that rarely gets

mentioned:

4. Banks do not make the lion’s share of the money on certain loans. Credit

winners who understand the system and use credit to their advantage make

far more money (especially on certain real estate loans) than the banks will

ever hope to make.

The Psychology of Debt

Appreciating this rarely discussed obvious truth can make you a lot of money

too. Banks make their fair share of lending money. You can make a far greater

amount of borrowing money for the right projects and for the right reasons.

You may be thinking at this moment that real estate and secured loans from

banks are totally different from credit card offers.

How To Beat The Lenders At Their own Game Read This For More Information about this topic.

The Psychology of Debt

Not true. A number of years ago my partner and I came across a quarter acre

of raw land with highway frontage in Silver Springs, Nevada. The owner needed

$5,000 quickly and there wasn’t time to arrange for traditional bank financing.

Credit cards came to the rescue. We knew we could each handle an extra $200

per month payment in order to pay off the loan in a reasonable time period. So

we each took a $2,500 cash advance on our credit cards and bought the land.

In this case, the credit card company made a reasonable amount of money at

their usual high-interest rates and we have since paid off the principal amount.

But the land was bought at the right price and we sold it for a handsome profit.

We used our credit cards to make a lot more money than the credit card company

did.

That’s what credit winners do. And that’s the purpose of this post. To get rid

of negative credit habits, to clean up your credit and start positively using credit

to your advantage.

But before you start winning with credit we’ve got your health to think

about

FAQ –