Debt has become ingrained in American society. Thus issue of government debt is a subject of another discussion but now, let’s focus on private debt held by individuals. There is a lot of information so let’s focus solely on credit cards here.
A September 2011 study by the BlackRock Investment Institute sheds some interesting light on this issue:
Currently, 70% of US GDP is driven by personal consumption activity. So the social and financial condition of households is critical to the US economy and has economic impacts as well as personal as most of us know people (probably several) that have serious debt problems. Since the mid 1970’s, the percentage of two-income households has increased from 50% to about two-thirds. Recently, the great recession has caused median household incomes to decrease. Between June 2009 and June 2011 (the recession was announced over in June 2009), the median household income fell by 6.7% to under $50,000 according to recent census research.
Credit cards- While some form of systems permitting several payments over time has been around for centuries, the modern form of “credit cards” as we know it is a relatively knew phenomenon. Diner’s Club, Inc. issued the first credit card similar to today’s in 1958 but it was intended mainly for traveling businessman at restaurants and other such places—not for frequent household use. Magnetic strips in 1979 allowed the easy swiping that we know today with credit cards.
And how we have fallen for these dangerous pieces of plastic. Federal reserve data shows that 609 million credit cards are held by households today and among those that do, the average balance is $15,956 and the total debt balance is $801 billion. Along with this balance, there is a high interest rate of over 12.78% on these debts and 46% of households in the US carry a credit card balance from month-to-month. Just think-banks pay you under 1% when you put your money there (a subject for a different discussion) but charge you over 12% when you borrow money from them.
Sometimes lost in the discussion of credit card debt (like any debt) is how much you will pay in interest as opposed to the original cost of the good or service you are using your card to purchase. For example, say you have a balance of $10,000 and you are paying the minimum balance which will be $200 in this case (all that many families can afford to pay with low incomes) it will take you 26 years to get it paid off and you will pay $10,687 in interest payments which is more than the cost of the goods/services to begin with.
So, what is the real interest you are paying? Technically we might say its 12.78% right? Well, in this example, you would pay $20,687 for a $10,000 balance which is 206%!!! So, tedhnically your interest rate is in fact 12.78%, the cumulative total rate is 206%. Do you think most people would pay more than double what something was really worth if they realized this? Of course not.
What’s the solution? First, you must decide that you will not become a debt slave. Next, you must learn to live within your means. American civilization survived without credit cards until the 1950’s and it’s fair to say we don’t have to have them. They are a two-edged sword—they can help you establish a high credit score but also can lead to misery. Debt snowballing which will be discussed in detail at a later time is how to tackle the existing debts.
To sum it up, remember our example earlier. A $10,000 balance actually cost you over $20,000 or over 200% of the original balance. You have to look at the big picture and realize this when making decisions because the banks are not looking out for you—they want your hard earned money to be funneled into their possession.
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