The psychology of debt: Why we do the things we do
By Lucy Lazarony • Bankrate.com

Perfectly intelligent people can end up with burdensome, unnecessary debt. Why? Sometimes, they're determined to live the life that they dreamed of, experts say -- even if they have to buy the dream on time. Sometimes, it is a failure to look at the big picture, to plan long term rather than short term.

"The more you make the more you spend and that rule is very, very true," says Christine Jones, a counselor at American Credit Counseling Service in Melbourne, Fla. "A good 75 to 80 percent is just living beyond your means."

People rationalize their spending
Many people rationalize the credit card bills with three simple words: "I deserve this."

"A lot of people today have a perception of what economic class they are in and they spend at that level whether they can afford to or not," says Tahira K. Hira, the founder of the Family Financial Counseling Clinic at Iowa State University.

And many people focus on getting what they want now and put off finding a way to pay for it until later. Credit cards make that quite easy to do.

"People run up credit cards to live a certain lifestyle and when the cards run out so does the lifestyle," says Steve Rhode, president of Myvesta, a debt and financial services company. "If you live a life on borrowed money, it's going to catch up with you."

Some people end up paying for fancy dinners out, designer clothes and furniture, for months, or even years, later.

"They say 'I don't care it if takes me 20 years to pay off; I really want this,' " Jones says. "And then three or four years down the road they wonder why they did this."

Don't trust the future to cure today's problems
Other people are wishful spenders. They convince themselves that they will have the money to pay off the purchase by the time the bill comes.

"I see a lot of people who are wishers. And people, unfortunately, keep wishing," says Howard Dvorkin, president and founder of Consolidated Credit Counseling Service in Fort Lauderdale, Fla. "You have to deal with what's happening now. Not what's coming."

Another common trap is focusing on monthly payments rather than overall debt.

"They say 'It's only $40 a month. I can pay that. That one is $25. I can make that,' " Jones said. "They don't sit back and take a look at their overall indebtedness because that can be scary."

We just don't know enough about our money
And ISU's Hira points out that a big part of the problem is financial illiteracy. Many people don't know their net income. They don't have a budget. And they simply don't understand how quickly finance charges pile up on credit cards. The debt on a card with an 18 percent annual percentage rate can double in just four years.

"People do not understand the power of compounding in the opposite direction when you're charging and you're paying that high interest," Hira said.

Experts suggest people establish a realistic budget for their income level and learn to live within it. Make do with one or two credit cards and pay them off regularly. Put a percentage of each paycheck into savings and keep it there. Depositing a whole paycheck into a checking account will only tempt people to spend.

"People spend what's there," Dvorkin said. "If it's not there, they're not going to spend it."

-- Updated: Jan. 22, 2002