My new e-book, How to Eliminate Massive Debts with Tiny Payments is online! I know a lot about this subject, as it happens, so I thought I would distil my experience into a quick guide to getting out of debt as fast as possible, even when you can’t afford it. Indeed, especially when you can’t afford it. So many people are, in effect, conned into taking on debts they can’t afford that now the whole world’s economy is busy choosing between a new Great Depression or massive inflation as the best way to eliminate the systemic financial toxicity.

I’ve written about debt and credit cards before, but this video, ‘Maxed Out’, is one of the best for explaining the predatory tactics of the bank and credit companies. Yes, people are at least partly to blame for getting into debt, but they are at the same time being tricked into taking on debts that are deliberately structured so as to be very hard if not impossible to pay off. Taking on credit card debts is like being a hapless dinosaur walking into the La Brea Tar Pits. I’ll summarise some of the tricks below, but first, here is the video.

Maxed Out: Hard Times, Easy Credit and the Era of Predatory Lenders [1h 30m]

OK. So, to the tricks. It would be posssible to write volumes on this subject, but a blog is not the place for it so I’ll try to be brief. Some of the tricks are blatant and obvious, and some are subtle and maybe even accidental to some degree.

First, a subtle one (not entirely accidental either: watch the videos on ‘The Century of the Self‘ to see why). The companies, the media and the government collude to promote the idea of a consumer-spending-based society: a fantasy lifestyle is promoted throughout the media and commercial worlds, to such an extent that citizens in the West typically end up feeling practically entitled to the ‘good life’. That feeling of entitlement runs deep and sits there in full form just beneath the surface in most people. And it causes massive overspending on endless junk and entertainment that people, in fact, do not actually need. Except in their heads. And that’s enough.

When the economic times are good, and regulation is going through one of its regular slack periods, people can take out large loans based on the ‘equity’ in their homes, and use that as they please. The debt gets added to what’s owed on the house, but when prices are rising rapidly this can be easily covered over a few years from the rising value of the property: the idea is if you get stuck, you can sell the house at a profit anyway. But when the market turns, as it always does eventually… houses get repossessed because the owners can’t or won’t sell them or they owe more on them than they are worth because the values have dropped.

This is a general pattern with lending, and not just on homes. It applies to bank loans, credit card loans and other so-called ‘unsecured’ lending (loans not based on your home or other large asset, generally). When interest rates are low, or inflation is high, it is usually possible to borrow easily. Then the screws tighten: maybe interest rates skyrocket from 2% to 20%. Maybe unemployment goes up massively. Whatever. The upshot is the banks get to seize a load of property from people who owe them money. This cycle happens 1-6 times over a normal human lifetime, roughly: once or twice massively, a few more times in a smaller wave.

The credit card companies and banks charge very high over-limit or overdraught fees, and high late payment fees. If you go over limit or are late paying, they often also exercise the right stated in their small print to increase your interest rates. They will also sometimes do this if you have been late or over limit to another lender. These companies make very big profits from delinquent customers as a result.

If they can’t get you with late/over-limit fees, the next best thing for them is for you to pay the minimum payment each month, forever, or for as long as possible. Customers who pay off their debts every month are worthless to them. So guess what? The poorest customers, that is, those most likely to be unable to pay everything off every month, are their most profitable customers (as a group). Big financial institutions finance these ‘payday loan’ shops you must have seen springing up like Japanese Knotweed all over the place in recent years. Why? Because those business specialise in lending to this customer group…

Bank staff are trained not in banking, but in sales.

When a customer starts struggling with their payments, the above charges and any others they companies can think of are quickly added to the debt. In the course of even just a few months a relatively small debt can be multiplied many times over by the charges. Finally the customer is driven over the edge and liquidates their assets, declares bankruptcy, or something similar. The bank gets the assets (approximately). They don’t care about the actual debt: the debt plus charges was the target all along. As soon as you show financial weakness they will pile on the charges and, in effect, take everything they can before you can stop them.

Big name banking institutions, pillars of the community, world famous names: these are among the worst, the most piratical. Don’t think that a famous high-street name will be honorable. They will not be, when the chips are falling in their favour as described above. They have all contributed to the way the laws are written; those laws allow their practices.

When customers try to re-finance loans, or consolidate loans, that is, trade-in their old loan with high payments for a new one with different terms and hopefully lower payments (the commonest type), it is not necessarily the case that those customers are given a good deal, or even a better deal. Maybe the payments will go down from £500 a month to £450 a month. Probably £250 would have been possible. Maybe the interest rate will go down from 25% to 20%. Sound good? But maybe the monthly payment will have gone down so much that over the long run of the loan, you’ll end up paying more interest overall. Whichever way you try it, there’s an angle for them… watch out. Do your own maths, carefully.

The banks target students in further education preferentially. Firstly, they are away from home for the first time and are easy prey for overspending. Secondly, those that evade that trap can become long-term ‘lifestyle’ customers who think that having some credit cards is normal and OK. And being future graduates, they could be high earners too. Good future customers for lifestyle loans for cars, houses, etc. Not many of them in the modern world will manage to keep enough of a surplus to save up instead of borrowing their way through life, unfortunately.

They keep offering more credit cards, more loans, more financial products… most if not all of which you can, in fact, do without.

They keep raising their customers’ credit limits, so they can borrow more, and more, and more… and have to keep working harder and harder and harder to keep up with it all.

Another subtle trick that is widespread in society: blame the debtor. But… isn’t it the debtor’s fault if they borrow all this money they can’t afford? Well, is it? Go back and look at some of those techniques described above, and see if they are fair. Is it fair to lend to students who’ve just left home? Is it fair to promote a high-spending lifestyle to people who know no better? Is it fair to cycle interest rates down and up, and to pile on charges the minute someone slips a little?

When someone gets into financial trouble, you don’t have to look far to hear or see someone using the ‘righteous indignation’ voice against them: “Just how do you propose to pay back this money that you owe?” Or, “How do you propose to take responsibility for your debt?” What is this? Are they reasonable, taking into account the sly tricks used to get people to borrow more than they can afford? I don’t think so. Debtors should not fall for this voice. It is the voice of sado-masochism, and it leaps out the minute such people think there is a possible victim in front of them. If you refuse to cringe, the sadist will look elsewhere for his meat. Read The Fear of Freedom (Routledge Classics) if you want a psychologist’s portrait of such people. For now, just be clear in your own mind that it is not your fault if the law allows these piratical financiers to rip you off. Sure, you made mistakes. Everyone does, many times throughout their lives, in different ways. But making mistakes doesn’t make it OK to trick you; to knowingly lend you more than you will realistically be able to repay in a reasonable time, at a reasonable rate. You have some responsibility. But don’t shoulder the entire blame. Two-thirds or more of the interest and charges are part of the scam and are nothing to do with you.

One last point. I mentioned that the laws allow this kind of rip-off. There was a case in point on the news recently. A company is sponsoring free travel on the London Underground on New Year’s Eve. That company is a loan company. In the attached picture, you will see that the “typical APR” (Annual Percentage Rate) is 2689%… yes, two thousand six hundred and eighty-nine percent per year.

When asked about it, the voice of the government authorities, on this occasion London Mayor Boris Johnson, said that they were a legitimate company regulated by the Financial Services Authority. So that’s all right then.

And it is. Officially. So look after yourself, because the government does not. And this applies just as much in other countries as in the UK.

This video was produced before the Credit Crunch, and was suitably subtitled, “America Before the Bubble Bursts.” It spoke of sub-prime lending before the general public knew it was a problem. The video is basically about debt, especially credit card debt, and the usurious interest rates and tricks the companies use to rope people in, with things like student loans, pay-day loans, interest-free periods, and so on. As a preacher near the beginning of the video says:

“Our society has been set up to keep us struggling and not give us relief. I believe that there’s going to be economic fallout and I’m telling my church to be prepared. What goes up, must come down.”

A housewife says this:

“I just feel like everyone is living above their means, or struggling to get what people could have years ago, like a house and a car.”

They were right; but the economic fallout seems to be to be only just beginning. Nowhere near enough debt has been liquidated to put the Western economies back on a sound footing yet.

Here is the video [1h 29m]

Credit cards. We all know how expensive they can be, but many people find them very convenient. What people don’t know is how the card companies trick people into permanent debt. It isn’t simply a matter of people being irresponsible (although it has its part to play): credit card companies vary their terms, at will, to trick the poorest people into the most debt. Why? Because people in financial difficulty are the best source of money. If you pay off your card every month you are no use to the credit card company because they can’t charge you any interest or any delinquency fees. They make no money out of such customers. The best customers are people who pay the minimum payment every month, or, better, miss it sometimes and pay late fees, over limit fees, and more. This video, ‘The Secret History of the Credit Card’ (just under an hour long) from the US Public Broadcasting Service, explains how it works.

How long does it take to pay off a card? This calculator lets you work it out, but a couple of sample calculations are given below. They assume the minimum payment is 2% of your balance.

1) First, a basic example. You have £100 on your card and the interest rate is 14% APR. It’ll take you 23 months to pay back £100 if you only pay the required minimum of 2.00%. Over that period of time, you’ll pay an additional £13.05 in interest.If you could afford to pay an extra £10 a month towards your credit card debt, it would mean you’d repay it in 7 months and you’d save yourself £9.58 in interest. In fact, if you could afford an extra £25 a month, you’d repay it in 4 months and save £11.82. Not too scary perhaps.

2) Now, take the same figures as above, but you owe £1,000 instead. It’ll take you 236 months (that’s over 19 years) to pay back £1,000 if you only pay the required minimum of 2.00%. (maybe you think you won’t pay just the minimum for 19 years - but things can change. You lose your job, or get ill, have an accident… and suddenly minimum payments could be all that are possible, for a long time). Over the 19 years or so, you’ll pay an additional £1,123.41 in interest (in other words, you’re paying twice over for it). If you could afford to pay an extra £10 a month towards your credit card debt, it would mean you’d repay it in 68 months (just over 5 years) and you’d save yourself £763.10 in interest. In fact, if you could afford an extra £25 a month, you’d repay it in 34 months (just over 2 years), and save £943.84.

3) Suppose now the credit card company has given you a more typical APR of, say, 20% on your £1,000 outstanding credit. It’ll take you 483 months (that’s over 40 years) to pay back a mere £1,000 if you only pay the required minimum of 2.00%. Over that period of time, you’ll pay an additional £3,622.71 in interest (you’re paying over 3.5 times for whatever you spent the money on). If you could afford to pay an extra £10 a month towards your credit card debt, it would mean you’d repay it in 80 months (just over 6 years) and you’d save yourself £2,983.72 in interest. In fact, if you could afford an extra £25 a month, you’d repay it in 36 months (just over 3 years), and save £3,337.53.

4) APR 24%? It’ll take you 3780 months (that’s over 315 years) to pay back a measly £1,000 if you only pay the required minimum of 2.00%. Over that period of time, you’ll pay an additional £38,752.57 in interest!! If you could afford to pay an extra £10 a month towards your credit card debt, it would mean you’d repay it in 92 months (just over 7 years) and you’d save yourself £37,831.47 in interest. In fact, if you could afford an extra £25 a month, you’d repay it in 39 months (just over 3 years), and save £38,383.04.

5) If the APR is 25% or above, the debt is unpayable with the minimum payment as the interest adds more than the minimum payment to your debt each month!

The motto? Either don’t use credit cards at all, or if you must, then pay at least £10 more than the minimum payment, ALWAYS. Indeed, the recommended system for paying them off is to pay AT LEAST the minimum payment PLUS the interest charged each month. Count THAT as your ‘minimum payment’. If you can’t afford to pay all your cards like this, then pay off the one with the highest APR first. Then destroy it. Then pay off the one with the next highest APR, etc. It can be handy to set up a standing order for this ‘minimum payment’ (the one that includes the interest) and always pay this same amount - even though the interest will go down each month (other things being equal), if you can afford it, keep paying as much as that anyway until the card is history. But… what do you do if you can’t even afford to do this much? If you can’t even make the standard minimum payments? Well,  there are various official methods, of varying efficacy (voluntary arrangements, bankruptcy) but which are not really much use to many people, as is the way with official methods generally. I’m looking on the web for a better solution; I’ll put a link here if I find something.