by Zain Jaffer
In late July 2023, the total credit card debt of all Americans reached one trillion dollars. It is still growing as we flush out the excess savings from the government pandemic cash handouts. Unfortunately, we have become a nation addicted to plastic. Credit card interest rates are now around 22-30%. That compounds into a huge amount if you don’t pay it off immediately.
To be able to cope better, many are now consolidating their various credit card expenses into just a single personal loan. The personal loan interest rate is around 7-10%, a smaller rate which is more manageable than the higher credit card charges per line item expense.
The problem is that when some people are able to save with lower charges, they don’t end up paying off their credit card debt immediately. What they do is to buy something else on credit. For example, if they are already paying off a mortgage, they still use their credit card and don’t pay it off immediately. On top of that they may just decide to live for the moment and charge something else, like a new car. Or a vacation somewhere.
Money is not infinite. Unfortunately the old adage of not buying something if you have not saved the money to buy it yet falls on deaf ears. Many are addicted to plastic, and just keep buying left and right without regard to their inability to pay off their huge debt. Then if a default happens, their credit scores becomes wrecked.
Now if you have the cash to actually pay for what you are buying, and you are simply buying products and services with your card out of convenience, with the plan to pay it back that same month, that’s fine. But that’s not what people are doing. They are buying on layaway, hoping that the money comes just in time for them to make their installment payments with interest. That’s bad.
American’s personal savings rate was at a high during the pandemic because of the CARES Act handouts from the government. But slowly all that money is dissipating. So increasingly many people are turning to debt financing without the means to pay that debt back.
Companies are increasing their layoffs because of the impending recession. That alone should send warning signals to many to stop buying using debt. Unfortunately it is not. Once you lose your job, of course that debt will remain unpaid.
The retail business knows how to market their items that fire off endorphins inside your brain. Huge SALE signs. Flashing lights. Shiny bright products. Of course that new watch would look great on your wrist even if you already have five watches. It’s not really the new item sometimes but the act of shopping that’s addictive for many.
Some people also try to cover for emotional issues in their lives with shopping. Maybe they have some unresolved personal relationship issues with their spouse or loved ones, and they end up using shopping as a crutch to cope with it. Sort of like how compulsive gambling attracts those who have some sort of sadness in their lives.
Having fun is fine. But having fun without self control and risking your financial future is not. If your credit card is making you recklessly spend, you may want to just either get rid of it, or make the act of purchasing a mutually acceptable decision with your spouse, partner, or friend to slow it down.
It’s really easy and tempting to just spend every dollar you earn. It’s even more tempting in the US to just spend without having earned the money yet by using credit card debt. Unfortunately that road will only lead us to disaster.
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