You probably didn’t need a newspaper article to tell you that Americans, individually and collectively, owe more money than ever before. And it’s not because housing costs more, although that is a factor.
The biggest culprit is credit cards. With credit card debt at record highs, and credit card companies doing everything they can to keep it that way, it’s no wonder lenders want bankruptcy reform: if enough cardholders were to file for bankruptcy, it could cause serious banking carnage. And that’s only problem one with this situation.
Credit cards are not evil. Like any tool, they can help or hurt you depending how you use them. In this day and age, credit cards are almost a necessity for adults; just try renting a car, getting a hotel room, or buying airplane tickets without one. College Students are especially vulnerable to the siren call of plastic money, graduating with an estimated $2000-5000 in credit card debt on top of student loans. Nor are students the only people who spend credit they have instead of income they don’t have.
If people living on the edge — or anywhere near it — have already maxed out their credit cards, they have no cushion against the bad things that can happen. They haven’t got savings (if they had, they would have put it towards debts) for emergencies like job loss or illness, let alone for certainties like the day they will no longer be able to work. And what will happen then? Either we will pay charities to take care of it, or we’ll pay taxes so they can receive government assistance. Oh, or they can turn to a life of crime. In any event, it will be expensive for everyone. That’s problem two.
Some experts warn that, with the Fed raising short term interest rates, a rise in credit card rates is almost certainly coming. The same rise in short term interest rates is likely to raise mortgage rates, which means that a home equity line is not the credit problem solver those television commercials would have you believe. Even if you own a house, and have actual equity. The short version is that people are going to feel a credit crunch –more money has to go to Visa and MasterCard on things they bought months ago, leaving less money to spend now — and that means consumer confidence and spending will both be headed down. That will directly effect the economy as a whole. Problem three.
So what can you do about this? Here’s some starter advice on credit. Or here’s a more comprehensive version. Pay off the cards. Keep them paid off. It’s one thing to use a credit card to pay a major expense over the course of six months, preferably interest free. Or to put everything on the card and just write one big check instead of twenty little ones. It’s another thing to spend money you may never have. Oh yeah, and if you have the occasion to tell somebody this advice, do it.