Not all debt is created equal. Some is useful, some is not, some is necessary, and some is downright evil. We will take a look at credit card debt in detail. Later on we will explore other forms of debt in more detail.
Credit Card Debt
Credit cards are like spoons. Both will get us in trouble if we lack discipline. However, I don’t want to demonize something because undisciplined individuals get themselves in trouble while using it irresponsibly. Credit cards definitely fall in that category.
Credit card debt, on the other hand, is pure evil.
Credit card debt is the third largest source of household indebtedness. Only the mortgage and student loan debt markets are larger. The average US household credit card debt stands at $15,611, counting only those households carrying debt. (nerdwallet)
Why is it so evil? The answer is simple, the rates are incredibly high and they are compounded with time. If you have bad credit, be prepared to pay up to 79.9% APR! (extreme case, according to creditcards.com). However, even if you have good credit, you will still have to pay between 10% – 20% APR after the initiation period (top 10 credit cards on creditcards.com). And to make matters worse, this interest in compounded monthly or daily in some cases (note: percentages listed above are Annual Percentage Rates, to see how daily or monthly rates calculated go here).
Credit cards have also earned a bad rep for their aggressive targeting of vulnerable populations such as college students, by flooding campuses with fliers, free t-shirts, coffee mugs and other promotional materials prior to CARD Act went into effect in 2010. Things have changed since then, in 2013 twice as many college students used debit cards as used credit cards. Still, average credit card debt of graduating seniors is around $4K. Many experts also agree that people tend to spend more when using credit card rather than spending cash. After all, it’s human nature, spending cash has an immediate impact, while a credit card payment can be put off until later.
There is no need to demonize credit cards, they are consumption tools and as such require training and discipline. Have you ever seen a baby using a spoon for the first time? Remember the mess they made? Well, same goes for credit cards, only credit card debt (mess) is a lot more expensive to clean up. As far as adult users go, we all know how to use spoons, it’s the lack of discipline that get’s us into trouble (i.e. overindulge).
Credit cards are like spoons. Both will get you in trouble if you lack discipline.
So, know thyself, and don’t use credit cards if you’re unable to pay the full balance (not minimum amount due, full balance!) every month and on time, otherwise you will get hit with late fees (if you’re late) and high interest rates which compound on regular basis at which point it quickly snowballs out of control. If you’re struggling with credit card debt, read this post
However, do use credit cards if you are always paying them on time and don’t carry any balance from one pay period to another while earning points and cash rewards. It’s also important to train the youth about credit card usage and the pitfalls that lead to credit card debt. Don’t just hand a 16-year-old a credit card and release them into the wild.
Another argument “for” credit cards usage, and this definitely falls in “personal opinion” category, is that credit cards are “safer” to use and offer a better protection against fraudulent transaction since the money doesn’t immediately come out of your pocket. In addition to that, the upshot for a potential loss is much reduced as compared to debit cards where in some cases, if you don’t report fraudulent transactions in time, you might be liable for the entire transaction (read more here).
With all of that in mind, credit cards aren’t for everyone. In fact, according to statistics, most people would be better off cutting up their credit cards and never using them again. This might sound harsh, but it’s the truth. However, blaming credit card companies for our lack of discipline is like blaming spoons for us getting fat. We must take ownership of our mistakes and learn from them, otherwise we’ll keep repeating them.
Continue reading about Consumer debt