Ask a Scholar: Does the Easy Use of Credit Bid Up the Price of Household Cost?

Jason Fertig

Dear Ask a Scholar:

Does the use of easy credit (including credit cards) bid up the price of household cost, making the impoverished seem richer than others as people argue? Our poor have TV and electric and so and so forth. How much of that is debt compared to real income?

Answered by Jason Fertig, Assistant Professor of Management in the Romain College of Business, University of Southern Indiana:

In short,  yes.  This is supply and demand 101. But let’s also look at some of the underlying issues.

Your inquiry suggests a discussion of manageable vs. unmanageable debt loads.  The average middle class family is unlikely to pay for a home in cash, so some level of debt is needed.  But, the presence of a mortgage does not make someone “poorer;” the borrowers do build equity.  Even financial gurus like Dave Ramsey advise people to “pay off all your debts except your mortgage.”

Of course, such borrowing can become excessive, as 2008 showed us.  Beyond the foolish attempts to view a home as an ATM with bathrooms and a kitchen, home-buyers may also qualify for a loan above their financial comfort levels.  A mortgage that takes up 50% of a family’s paycheck is not advisable, as the lights need to be on and the fridge needs to be filled.  There is a reason that we can speak of people who are house poor – they own a house, but barely have enough leftover bread to furnish it. 

On another front, is it bad the “the poor have TV and electric”?  Advances that have made such items affordable for the masses have increased their quality of life.  While we’re free to speculate wants versus needs, only a hardcore minimalist would argue that more people need to move off-the-grid.  But where does necessity end and luxury begin?  Occupy Wall Street protesters with iPhones showed us that those lines can be blurred.  Additionally, having higher income levels qualify for Supplemental Nutrition Assistance (ahem, food stamps) causes $100 smartphone plans and $150 cable bills to become doable.

Yet, an area that you did not touch on is student loan debt, which continues to outpace credit card debt.  That’s really scary.  $20,000+ average balances for what in return?  Educating the whole person and finding yourself is great, but that can be done on YouTube, Khan Academy, and iTunes U for substantially cheaper.   Don’t believe the spurious correlation of degrees to future incomes.  It doesn’t imply causation and it doesn’t include debt levels.  Some graduates will benefit from their college “investment,” but an increasing amount of individuals will incur 30 years of debt for an “education” that could have been had on-the-job with someone paying them instead.

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