Latest published data from the Federal Reserve Economic Data (FRED) site shows that American credit card debt is now fast approaching the $1Tn mark. As of May 31, 2023 it had reached the $991.3bn mark. [1]
Credit card debt is unsecured, meaning when you charge an expense you don’t really have collateral that the card company can sell if you default. Hence they use higher interest rates to offset their higher risk. As of February 2023, FRED data puts credit card interest rates at the 20% range compounded monthly.[2] That is an extremely high rate for anyone, but it becomes extremely hard for poor families just trying to make it by. It is the highest credit card interest rate recorded since 1995.
Banks that issue these cards are the ones that lend you the money. Visa and Mastercard as well as other credit card just act as the payment gateway and network. Right now the banks are squeezed because many of them hold lower interest rate bonds (pre Fed hike) and they also are seeing a lot of defaults in mortgages and car loans, as well as office properties that have gotten foreclosed because there are very few tenants. Hence banks are reluctant to lend unless you can pay them back. With unsecured credit card loans, they better make up a big margin, hence the interest rates are so high.
The problem right now is that many families already have depleted savings because of the pandemic since many of them could not work or run their businesses for a time. When the pandemic eased up, although they could start again, they needed to spend for some things that they had neglected. Also quite a few of them had to take vacations or spend on items that could bring some relief to the mental stress they underwent.
So now just to tide things over, many are using their card as a means to bridge finance between the time they need to spend, and the time they receive their salary or business payment. The problem here is if the credit card is not properly used, and the debt is allowed to linger for a while, accumulating interest at a high rate. Sometimes that leads to credit card default, which impacts your credit score.
If you know you have the cash to buy an item, but are just not carrying it with you, and you can pay it within the first billing period, then that’s fine. If you have the means to pay for a new appliance on installment with a credit card, you can if you are okay with the interest charges.
Understandably with high crime rates these days, carrying a lot of cash on you is like tempting fate.
The problem is if you aren’t really sure when you can pay for a purchase but you charge it anyway because you want it, then you run the risk of a very big bill down the road.
Just like our national debt that is already almost at $31Tn, it appears that the national credit card debt is following in its footsteps. If left unchecked, both have the potential to cause untold misery.
We really need to rein in our expenses to be inline with our realistic income forecasts. This is a value that we as a nation seem to have forgotten. It is time to strengthen the discipline of spending only when needed and knowing how to pay back a debt on time.
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