How Do People Get Into Debt Problems?

Doug Hoyes explains how debt problems build slowly—one credit product at a time.

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We’re seeing higher and higher debt levels now than we’ve ever seen among the people who are claiming bankruptcy. I’m often asked, and you’ll know the answer to this, how are they gaining access to the credit this deep into the problematic situation?

$1 at a time. So that, that’s how it works. So, you know, you get a credit card with a few thousand dollars limit and you’re paying that on time, so you qualify for another one, and then I get a car loan, then I get a whatever other kind of loan it is, and it just grows and grows and grows. And so, as you know, you know, banks and lenders use the credit score as one of the determinants of whether they’re gonna lend to you.

And as you know, you know, that’s kind of kind of a scam because it’s something that is there for the lenders, not the borrower. If you’ve got five different credit cards with a $10,000 authorized limit, and you’re carrying a balance of 2 or $3,000 on each one of them. The wealthy barber would say, you are nuts. You’re paying a huge amount of interest.

You should pay it off. But the credit scoring system says, Hey, you’re making your minimum payments every month. You’ve got a relatively low utilization. You are the perfect guy. We’re gonna give you a high credit score, which means now you can qualify for another loan, and another loan, and another loan.

And then if there’s any hiccup at all, you’re off work for a couple of weeks, you get sick, you get divorced, whatever. Now you can’t service it, so you end up with a, with a huge amount of money. Like we said earlier, the reason you have a lot of debt is ’cause things were going pretty well at some point in the, in the past.

And you know, every lender is not looking at every other lender all the time, they obviously have access to your credit report. So if it gets too high, they may start pulling back. But look, they all wanna make money. And if they think that you’re the kind of person who can at the very least make their minimum payments, then they’re happy.

Like does the credit card company really care if you ever pay off your credit card? Is it not true that the perfect customer is someone who makes their minimum payments for 20 years?

Because under that scenario, you’ve paid back the original debt three or four times over, but you still owe it and they’ve got a, a beautiful cashflow annuity.

So that’s why lenders are happy to lend, because they can make tons of money off it.

Well, yeah, and again, for the audience too, they know they’ll have a certain default rate that some people will have to go down the insolvency road, but they’ve factored all that into the math. And of course, it’s very much reflected in the high interest rates of 20 21, 22%.