The U.S. Census Bureau projected that there was $870 billion in consumer credit card debt on over a billion cards in the U.S. in 2012 (final numbers haven’t come through yet). That’s a lot of money, but the question remains whether that’s a bad thing. Jeremy and Jennie argue about credit cards.
Credit has been a touchstone of our shopping experience for decades, and its associated debt is a cold-but-expected wake-up call. Generally speaking, we have a tendency to spend beyond our means, given the chance–and boy, do credit cards give us that chance.
The Fed recently released a study comparing 2007 credit card debt with 2010 data and found after the Great Recession had TKO’d our finances, the median card balance was $2,600 (down 16.1%), and that 39.4% of families had credit card balances (versus 46.1% in ’07). Unfortunately, this decrease in debt wasn’t due to an influx of cash. It’s the result of debt holders defaulting on payments and declaring bankruptcy, Nigel Gault, Chief U.S. Economist for IHS Global Insight, told NPR. When the recession siphoned jobs out of the economy, the chunky bills kept coming in and our checking and savings accounts croaked.
Let’s bring this issue into the real world. Joe Consumer has a cell phone. He wants a better one, despite the fact that the up-front cost of the phone is out of his budget. He’s got a credit card though, so who cares? He puts that $250 balance on the card and downloads apps the whole way home. However, since JC doesn’t have the cash in hand to pay now, there’s a good chance he won’t have it next month and that balance will continue to roll over each billing cycle–along with any other expenses he accrues along the way. Worse, change that $250 to $2,500, or even $25,000 and Joe’s got himself in a dangerous situation.
This example, applied more broadly to the housing market, car and student loans, and other consumer debt, spotlights the problem for both ourselves and the economy caused by careless spending. The solution, unfortunately, is difficult to embrace. We need to manage our spending habits and keep our purchases within our means, lest we continue to epitomize Harvard philosopher George Santayana’s words, "Those who cannot remember the past are doomed to repeat it."
Credit may seem like the sweet siren beckoning us to the jagged rocks of debt, but it isn’t always the case. In fact, using credit, even revolving credit like credit cards, can help your bottom line.
Think about it this way. A properly managed credit card builds credit. By paying the bill on time and keeping the balance low, good management will show up on your credit report and can boost your credit score. So if you take out a student loan–sometimes considered "good debt" because it’s an investment in your future livelihood–you may get better terms on the loan if you have a history of managing debt well, because it’s a good bet that you’ll pay off the loan in full.
The same reasoning works for a mortgage, which you’ll need if you want to buy a house. Not many people have $226,000 (the average loan size as of January 2012, according to mortgagebankers.org) just lying around. Mortgages are sometimes also consider-ed good debt. With every payment, you’re building equity in the house (albeit slowly), and depending on the health of the market, the house could increase in value while you own it.
Before you vilify credit cards, remember this: if you pay them off every month, you won’t go into debt. Plus, credit cards offer all kinds of perks. For example, you’re only liable for up to $50 if your card is stolen. Some cards offer return protection–so if a company is refusing to accept a returned item, the credit card company accepts the item and credits your account. Some card companies will even refund a purchase if it’s stolen or broken within the first 90 days, and some will extend warranties for a year. They’ll even cover you if you rent a car with your card. Pretty cool, right?
Yes, a credit card can get you into trouble, but if managed properly, it can be an amazing tool that has your back.
By Jennie Bartlemay Copyright 2013 brass Media, Inc.