Kicking the Credit Card Addiction

Jason Hull argues, through personal experience, that the standard financial and behavioral approaches to debt may be missing the mark

People who have experienced difficulties are often the best positioned to help others facing those same problems.

That goes for a child of divorce who now counsels clients with failing marriages, and also describes an advisor who has personally experienced the dangers of debt addiction.

Fort Worth financial advisor Jason Hull, a popular blogger, gets personal about his bouts of credit card binging in a post that is all the more interesting because he also had a later experience as a credit card company executive.

Hull covers familiar ground in noting there are two general approaches to paying off credit card debt.

The mathematically sound method is to pay off higher rate cards first, to arrest the negative compounding and pay a smaller total interest tab, ultimately.

There are those who take a behavioral approach, however, arguing that it’s of greater value to pay off a smaller debts first in order develop a feeling of accomplishment needed to make further progress.

As a newly minted Army officer with paychecks and a couple of credit cards, Hull succumbed to the temptation to use his credit for nights on the town and other unneeded expenses that did not abate after the first time his card got declined.

Rather, he would pay off debts to give himself “breathing room,” and keep on spending. That is what makes Hull suspect that there is an element of addiction involved in the experience of credit card users.

What’s  more, as one who worked for a credit card company after his Army career and before he became an advisor, Hull says cardholders are essentially locked in a chess game with an opponent whose goal is to encourage indebtedness (rather than, say, encourage repayment of the debt).

“The optimal customer stays right at the edge of maximum repayment capacity," Hull writes. "That’s why there are minimum payment amounts – to anchor you.”

Working with the insight that addictive behavior is involved, Hull explains that it is likely that the card user knows and wants to stop spending but continually falls off the wagon in the same way the chemically addicted do: through reuse of the card (just like re-use of a drug just fuels the habit, which is why rehab centers prevent a person from gaining access to the drug). He cites other factors such as stress that might induce spending to relax just as perhaps one might smoke a cigarette to relax.

If addictive behavior is at play, then neither the mathematical nor standard behavioral approaches may be addressing the real problem nor provide the best solution.

Rather, Hull suggests a credit user cut off the source of the addiction — by canceling the card after paying it off. While this would negatively impact the user’s credit, it will give him the time he needs for rehab and save money over the long term since failure to do so may induce the user back onto credit.

It may also be necessary to stage an “intervention,” where somebody else assumes the user’s spending authority — the equivalent, he says, of an addict checking into a Betty Ford clinic.

Hull also offers a more esoteric idea wherein a credit card is programmed to allow expenditures on necessities while denying authorization for flat-screen TVs.

The financial advisor says he does not “blame the credit card companies,” and faults himself for his bad personal decisions in his youth. His focus is strictly on individuals’ use of credit cards.

But in a period where Americans are still dealing with the after-effects of a global financial crisis brought about by the massive abuse of credit, it is worth pondering how public policy might further refine how consumers — and large financial institutions as well — access and use credit.

A system that is tethered to a credit user’s actual means of repaying the debt (rather than simply making “low monthly payments”) could perhaps improve the financial footing of individuals, institutions and all levels of government.

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