Flirting with Credit Card Disaster—-Again

It was said of the Bourbon kings that they “learned nothing and forgot nothing.”

Millions of Americans, who lived through the horrors of the market meltdown of 2008 that was accompanied by a spike in credit card defaults, apparently have learned nothing.

That’s because many of them are running up huge credit card debts,

That’s what a new annual survey by NerdWallet.com on household debt will say. The study, due to be released soon, will warn that total household debt is growing faster than household income.

“The cost of debt is staggering,” the NerdWallet report will say.

Commonsense not Wanted Here

They are ignoring the commonsense of credit card use that has been preached here and in other places. Our commonsense calls for cardholders to be transactors, not revolvers. The former pay off card debt each month and pay zero in card interest. The latter carry card balances from month and month, paying as much as 20 percent interest and flirting with disaster.

The full NerdWallet report, which is slated to be released this week, will paint a frightening picture of the cardholder who is a revolver. Using Federal Reserve Board numbers and polling thousands of Americans, the report will say the average household is already paying a total of $6,274 in interest per year.

The Federal Reserve recently reported “that consumer credit increased at a seasonally adjusted annual rate of 7-1/2 percent during the third quarter.”

The Federal Reserve also said revolving credit grew in the same quarter at an annual rate of 6-1/2 percent while non-revolving debt rose at an annual eight percent rate. Overall, in September “consumer credit increased at an annual rate of 10 percent,” it said.

A “Noticeable Pace” of Credit Expansion

“We have been seeing revolving debt going up at a noticeable pace for several quarters,” said Bill Hardekopf, CEO, LowCards.com. Many Americans also notice the same thing. A record number of respondents, in a soon to be released new year’s resolutions poll, say paying down credit card debt is their top priority.

Card debt is the third largest debt in the average American household, after mortgage and student loan obligations, the Federal Reserve says.

That increasing debt load, the NerdWallet report warns, will “become even more burdensome” if, as expected, the Federal Reserve raises interest rates this month.

Decades to Get Out of Debt?

Higher interest rates mean, at the current pace, it could take decades for some cardholders to rid themselves of card debt. Some households will need some 40 years to pay card balances, the report will say.

“These numbers represent a very common problem for individual Americans: An overwhelming level of personal debt that can be impossible to pay back,” wrote Erin Shank, a Texas personal bankruptcy attorney.

However, there is another way, a more sensible way that can lead you and your family to a better life.

The average US household credit card, wrote NerdWallet CEO Tim Chen in a recent commentary, now “stands at $16,140, counting only those households carrying debt.”

Based on an analysis of Federal Reserve statistics, the average household owes $7,529 on cards. That average includes transactor households. They pay entire card balances each month, avoiding interest.

The Opportunity to Become Wealthy

But let’s go back to that needless $6,274 in credit card interest per year. Think about that. Think of all the opportunities for wealth these households are missing because they lack spending discipline. They are throwing away their chance for financial independence.

Let’s say one took $3,600 of that money each year and put it into good investments (The other $2,674 could be spent on whatever you and your significant other wanted). You invest $3,600 a year, or $300 a month, into good index funds. You do it faithfully for 20 years and earn nine percent a year (I use nine percent a year because that tends to be the long term rate of return of the stock market).

What do you have?

You have some $201,000. By the way, do it for 25 years and you have some $338,000. Do it for 30 years and you have $553,000! All because you were intelligent and didn’t throw away your hard earned money on credit card interest.

Where’s the Danger?

How does one reach that point? Or, more importantly, how does the cardholder know he or she is reaching the danger point?

“I would say whenever one can’t pay off one’s card debt each month and avoid 15 percent or more interest charges,” Hardekopf said.

But there are, he adds, “special circumstances in which a person must pay unexpected medical bills or a car bill so one can keep working. He also says that one can carry a card bill over a term if there is a special zero percent deal.
“However,” Hardekopf adds, “it’s best to pay bills each month.”

Meanwhile, here are some sobering red ink numbers Americans are facing:

U.S. household consumer debt profile:

• Average credit card debt: $16,140
• Average mortgage debt: $155,361
• Average student loan debt: $31,946

In total, American consumers owe:

• $11.85 trillion in debt

o An increase of 1.7% from last year

• $890.9 billion in credit card debt
• $8.17 trillion in mortgages
• $1.19 trillion in student loans

o An increase of 7.1% from last year
o Source: Federal Reserve

About The Author

Gregory Bresiger

Gregory Bresiger is an independent business journalist from Queens, New York. His Personal Finance articles have appeared in publications such as The New York Post & Financial Advisor Magazine. He is the author of the eBooks “Personal Finance For People Who Hate Personal Finance” and “MoneySense”.