Life on credit

Economics professor Ernst Fehr explains why people get into debt without meaning to.

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October 21, 2013, Lukas Hadorn (text) und Lina Müller (illustration)

The lease rate turns every sport coupe into a truck, or so the saying goes. Still, no other type of debt financing in Switzerland is as popular as car leasing. According to the Swiss Federal Statistical Office (BFS), 10 percent of the population lives in a household with at least one such loan arrangement. People also like to purchase furniture, vacations, and electrical devices on credit. Overall, more than 18 percent of people in Switzerland have a loan, not including mortgages on principal residences. In most countries the level of debt is even higher.

Why do we go into debt at all? It's all down to people's "preference for the present" according to Ernst Fehr, Head of the UBS International Center of Economics in Society at the University of Zurich. "We want it all here and now. We ignore the fact we'll have to pay more for it later on." This leads to a distortion of consumer decisions and often makes loans for short-term purposes economically irrational.

Value shift
Nevertheless, a large part of the population is fairly "debt-averse", says Professor Fehr. "Many people have an inner dislike of debt." But this can also lead to economically irrational behavior. For example, if someone insists on paying off their mortgage debt, even though it would make more sense to keep part of it, as mortgage interest is tax deductible. Still, this aversion often goes hand in hand with self-discipline and self-control - important skills for getting ahead in life.

Professor Fehr stresses, however, that the younger generation is exposed to a very short-term outlook. "You find this on advertising posters. The new handbag, the new bike - everything seems within reach with a consumer loan." This is a change in values that Swiss Debt Advice SBS also criticizes. They express concern about "the increase in advertising campaigns for small loans with trivializing content." Experience shows that consumer credit plays a major role for one-third of those who are indebted. The solution lies in prevention. It's worthwhile drawing up a budget. After all, the path from a mountain of debt to the valley of tears is a very short one.

Balm for the budget

  • Create a household budget and don't spend more than you earn.
  • Set up standing orders for recurring expenditures at the start of the month, and set aside money for taxes each month.
  • Save money for vacations and major purchases, for instance by transferring your bonus salary to a separate account.
  • Pay bills promptly.
  • Compare prices and check your insurance policies to ensure that you are neither over- nor underinsured.
  • Housing costs should not exceed 25 percent of your income.
  • Never take out a new loan to pay off an old debt.
  • Seek help if you're getting over your head in debt.

For a budget planner and tips on saving go to