July 19, 2011
How People Think About Credit Cards
The austerity program millions of Americans adopted at the onset of the Great Recession is officially over: consumer debt is on the rise again.
Before we run our personal debt back up to its ceiling, it’s a good time to examine the different ways people think about their credit cards.
First, the economists. They have a clear definition of credit cards. The act of buying something on a card and adding to a balance is known as “dissaving.” The opposite is also true. Americans, for example, cut up their credit cards with a vengeance after the 2008 recession. They paid down some $180 billion in revolving credit card debt between September 2008 and April 2011. This gave a big boost to their savings, as far as economists were concerned.
But regular folks naturally link credit cards to spending. Kim Cooper, a Philadelphia financial consultant, said she used to feel that paying down a credit card meant she could buy more shoes or shop at Lord & Taylor again – with her card. This common mentality indicates just how integral credit has become to our buying habits.
The problem comes when the bill accumulates and becomes a monstrous financial obligation. And according to new data, Americans are piling up debt: in May, revolving credit – primarily credit card debt – grew by $3 billion, or 5 percent, to $793 billion (still far below the August 2008 peak of $974 billion), according to the Federal Reserve.
Overall debt also increased, for the eighth straight month. This includes revolving credit as well as auto, student, boat, and other personal loans.
Cooper eventually paid off her cards, but understands why people get into debt. “When I paid down the bills, it was never part of my thinking that a zero balance was the goal,” she said. The goal for her was being able to afford the minimum payment. “That’s not the way to think about it,” she said.
There are two theories for why debt is rising. One is that the economic expansion has made Americans feel richer, so they are spending more. The other is that people are using credit cards to make ends meet. Given that the June jobless rate rose to 9.2 percent, the economy is very weak, and foreclosures are still widespread, I’d bet on the latter, though it’s impossible to know.
But Americans are spending more, a March survey by the National Foundation for Credit Counseling found. Three in five Americans are spending the same or more this year than one year ago, reversing a two-year trend of lower spending and belt-tightening for a majority of Americans.
Whatever the reason, is more debt a bad thing? Not necessarily: borrowing at a low rate has its advantages. But that argument doesn’t fly with credit cards that charge double-digit interest rates at a time when short-term rates are near zero.
Here’s another way to view credit cards: the long-term view. Paying down a credit card balance is a way to build one’s net worth, the sum of assets minus liabilities.
If you’re planning to retire some day, a strong net worth profile is a good thing. In that way, paying down debt starts to look a lot like saving.