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.

11 Responses to How People Think About Credit Cards

  1. joel margolis says:

    The woman’s a financial consultant and doesn’t understand basic economics? I pity her poor clients.

  2. Kim Blanton (writer for Squared Away) says:

    Dear Joel,

    My bad. I’m afraid that my unclear writing — and not Kim Cooper’s financial practices — are the problem here. She is actually a high-profile financial planner who has reformed her bad old ways. She uses her personal experiences when speaking to people about how to kick their credit card habits. Thank you for your comment!

    Best, Kim

  3. Paul says:

    This article is dead on. The Fed data continues to show consumer debt is on the increase. It will be interesting to see how the data shapes out over the next few months.


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  5. Chidits says:

    There are people who pay off their credit card balance in full when they receive their statement for the month, and in doing so build an excellent credit rating. By doing this they also avoid the dangers of interest and late payment fees, and keep the card clear for purchases which need to be made at short notice. It is entirely reasonable to use credit in this way, but the big risk is when you are making only the monthly payment each month on the balance of your card. Doing this, it will take forever to pay it off. If you are using credit to pay for continuing, necessary costs, then you are likely to run into problems somewhere along the way. Work out a budget and live by it – it may be tight, but you’ll never have to hide when the doorbell rings.

  6. credit loans says:

    Spending on things using credits cards are like borrowing unsecured loans. It has no collateral but only relies on the creditor’s word. As mentioned, some credit cards even have double-digit interest rates.

  7. Most people live by the rule of saving AFTER they spend, whereas they should turn this the other way around and only consider spending after they’ve saved.

    That may go some way in helping to reduce indebtedness.

  8. I am with you on the reason people are using credit cards is to make ends meet. I’d rather use a credit card to buy groceries, and use my available money to pay bills (most importantly – mortgage) to keep them from being late payments. Yes, it is robbing Peter to pay Paul. However, you never know what the next day or month will bring …

  9. AES says:

    America is quickly reducing their overall credit card debt. Just a few months ago, outstanding student loan debt overtook credit card debt. Student loan debt is the new problem.

  10. Jay Gould says:

    Americans are now paying down their credit card debt at a much slower pace than during the months immediately following the Lehman collapse in September 2008, but they continue to do so all the same. Additionally, the delinquency rate on U.S. credit cards – 3.04 percent in September, according to Moody’s, is at a record low.

    Falling delinquencies have led to lower defaults, which will keep falling for months ahead, even as the late payment curve may have bottomed out already.

    Moreover, the monthly payment rate (MPR), which measures the ratio of their credit card debt Americans are paying back at the end of each monthly cycle, was at 21.29 percent in September, compared to a historical average in the mid-teens.

    If that is the new normal, it will ensure that low delinquencies and defaults are also here to stay. Of course, there is also the possibility that, once we get back to full employment and consumer confidence improves, everyone will fall back into their free spending pre-Lehman pattern. Unfortunately, we are unlikely to be able to test our propositions anytime soon.

  11. PSA says:

    Great stuff here. Our country needs to get back on track!