Two Debt Tips From a Harvard Economist

Harvard economist John Y. Campbell shares two simple principles to keep in mind for managing debt.

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 What about on the debt front? Obviously the credit card industry. I mean, when, when I was young and you and I are approximately the same age, credit was made available by certain institutions. Now credit is aggressively marketed. They are trying at all times, all different angles to get people to borrow.

What are some thoughts on everything from credit cards to lines of credit?

Well, you know, I think. The general principle should be well, let me offer two thoughts, two principles. One is, um, credit is cheaper if you arrange it in advance right before you need it, before you need it. So indeed, you know, having a credit card or a line of credit, uh, which is set up before the emergency tends to work out better than, you know, suddenly being caught short and desperately trying to look for, for sources of funds.

This is what, of course, leads. People in the US to, to very high cost lenders, likepayday lenders.

Yep.

Um, the second thought is that things generally go better when credit is tied to income, what you’re gonna use to pay it back rather than tied to spending what gets you into debt in the first place. So we are in favor of innovations like paycheck, advance credit, where employers can you know, accelerate a paycheck a little bit in, in, in implicitly lending the employees money. We think that’s much better than buy now, pay later credit which, which is tied to impulse spending and encourages people to, to overspend because it doesn’t feel like you’re spending any money.

Those are great points. In fact, you brought up the impulse spending. We see more of that now than ever. Of course not because humans have become weaker, but because technology through the algorithms has become better at exploiting our weaknesses. And the technology that you and I talked favourably of earlier, maybe AI steps in and helps people with their financial advice and their financial programming, but it’s also can work against us quite easily, and of course it is.