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credit cards: useful tools or the devil reincarnated?

Updated: Oct 11, 2023


Americans now hold a record amount of credit card debt — over $1 trillion, according to the Federal Reserve Bank’s latest data. On average, Americans carry around $5,733 in credit card debt. But when you break it down by age, most carry more than that.


I’ll never forget the moment I first applied for a credit card – I was in college, probably 19 or 20 years old, and I had walked up to this table that was set up in the lobby of my dormitory with a big banner/logo from a major national bank – they were giving away free pens and those little squeezable stress balls – but more importantly (to them) they were enticing students to sign up for their credit card…… and so, I did. At that point in time, I had no true financial education aside from knowing that over my teenage years, I was able to work some form of part time job to earn an income that I could use to buy things I wanted. But now, I suddenly had access to this card that would magically allow me to buy things, up to $3,000 in value, no questions asked. Well, I quickly learned that there were in fact questions asked but in the form of a monthly statement in the mail that said I needed to pay it back and if I didn’t do so relatively quickly, my $3,000 amount owed would start to become a much bigger amount based on something called a 15% APR or Annual Percentage Rate. It represents the annual cost you pay to borrow money from a lender or credit card issuer. While the idea of having credit available to me sounded great, I quickly learned, once again, that I did NOT like the idea of having a mailed statement arriving to my home REMINDING me every month that I owed someone money that I DID NOT have.


So, let’s take a closer look at current credit card balance statistics:


Americans between the ages of 40 and 49 hold an average of about $7,600 in credit card debt — the highest of any age bracket. The second highest average debt balance falls with those between the ages of 50 and 59 with about $7,200 in credit card debt.

On the other hand, the youngest credit card users between the ages of 18 and 29 have around $2,900 of debt. This is understandable since most people in that age group are just beginning to use credit cards.


Now let’s talk about what Americans are being charged a year to carry these balances. The average interest rate on bank-issued credit cards has reached a hair above 23% this year compared to about 17% at this point last year.


This statistic marks the highest interest rate since the Federal Reserve began tracking this data in the 1970s. According to a recent TransUnion credit report, the rate at which U.S. consumers in 2023 will miss payments on credit cards and personal loans is expected to surge to levels not seen in over 20 years. We are now seeing data confirming this.


Let’s take this example: say you have $10,000 of debt on a credit card with an APR of 20%.

The credit card issuer calculates a “Minimum Payment Amount” per cycle based on either a flat percentage of your balance, so in this case, the minimum payment will vary based on the size of the balance. It’s usually about 2% of the balance.


Or


A certain percentage of your balance plus interest or fees from the prior period. You likely have seen this dollar amount on your monthly statement.


Paying the “Minimum Payment Amount” every month will keep your account in good standing and provide you more time to pay it off, however, it will also cause the total amount paid to be higher due to interest charges. If you don't pay at least the minimum by the due date, you could be hit with a late fee and a penalty on your annual percentage rate. After 30 days without paying at least the minimum, your account can be reported delinquent, and your credit score could also take a hit.


So, for this example, paying the card issuers calculated minimum payment per cycle of say $200, would result in you taking 9 YEARS to pay off the balance AND would add an additional $10,900 in Interest Charges that you would have been responsible for paying. That’s an additional 109% of the original debt balance of $10,000.


Insane.


Teach your kids that credit cards are not “free money” via a cashless transaction. There is a consequence of borrowing that money unless paid back right away.

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