Do we need a debt course and exam before taking on debt?
Massive debt levels with individuals, governments, and corporations are creating big problems in Canada and around the world:
- The Financial crisis of 2008 occurred because of major debt problems with subprime mortgage lending.
- All of the problems in Greece are a direct result of debt problems
- Closer to home in 2011, US President Obama had to make a public plea to Americans to raise the debt ceiling
- In 2008, The Canadian government had to step in and prevent banks from lending out 40 and 35-year mortgages
- In 2010, The Canadian government-mandated rules where credit card companies have to show how long it will take to pay off credit cards with only minimum payments
- Mark Carney is so reluctant to raise interest rates because of fear of what it will do to our fragile economy given the massive amounts of debt
Many people suggest that the root of the problem starts with a lack of financial literacy, especially at a young age. If you think about it, there are very few formal financial education programs in schools so maybe we are developing these bad habits at a very young age. In fact, I’ve seen a number of examples this year:
Marius in med school
Some participants in one of my workshops were talking about a 20 something medical student who was given a $100,000 line of credit for school and then used it to buy a $60,000 car.
Credit cards to 19-year-olds
I recently talked to a couple that has a son (Jake) with a history of trouble with the law. Their son was caught shoplifting at the age of 16. Part of it was just for fun but part of it was because he did not have money to buy some clothes he really wanted.
The parents have been working hard to get him back on track and teach him about the value of money and how to get a job to earn money. They were teaching him about setting up a budget and a bank account. So when Jake came back from the bank with a bank account and a credit card, his parents were shocked at how easy it was for Jake to get a credit card at the age of 19.
A 28-year-old with too much debt
I had parents who wanted to pay me to counsel their 28-year-old daughter on her finances because she had racked up 8 credit cards to the max along with a line of credit, a car loan and some personal loans from her grandmother.
What’s the solution?
When I hear stories like this I can’t help but wonder if we need to force people into getting a debt training license like we issue driver licenses. Just this past weekend, I spent 4 hours taking an online boating course and an exam to get my boating license because we are planning our holiday in the BC Okanagan. The course and the exam weren’t tough but it was time-consuming. Although some of the course was common sense, I learned some important things about driving a boat.
Maybe before adults can get a credit card, a line of credit or a mortgage, they have to take a debt course and exam so they really understand the prudent ways to use, manage and take on debt.
Maybe they should have to take a course to understand the serious problems that come from excessive use of debt. We put warning labels on cigarette packages so people understand the risks of smoking, maybe we need to find a way to warn people about the dangers of debt when abused.
Do you think a debt course or exam would help people manage debt better? What solutions can you suggest to help people understand the risks of using debt incorrectly?