Chatting Money

We all know that in today’s world, spending isn’t only necessary, it can be fun. Sooooooooo fun. Some purchases bring true, unadulterated joy. Give an example you say? Last week I bought these slip-on purple “athleisure” shoes (all the rage, right?), they’re comfortable like socks, but actually shoes, I’m in love. I may need another color. Need? Probably not, but they’re bringing me joy.

Of course I can’t have this fabulous footwear derail my financial security, so I have to be savvy about which pieces of unadulterated joy come into my life, and how I spend. I of course bought the purple pleasure on Amazon, which has my credit card on file. That just makes life easier, doesn’t it? Yet credit cards can be a very tricky business, so it had me thinking, and I did a little reading up on credit cards.

First thought, do you remember when and how you got your first credit card? I’m pretty sure I was 19 or 20, and in school stretching every penny to barely cover every purchase, books, a cup of coffee, food in general, and I was THRILLED for this chance to buy things without needing to pay right now. Delayed buying sounded like the perfect solution when I always was short on cash, and knew I’d get another paycheck soon enough. (I was both waitress-ing and working at Starbucks, kept me flush with coffee and tapas – it was a Spanish restaurant). The credit card was just like getting an advance to smooth out the bumps between paychecks – that was my thinking.

I’m not alone in that thinking. Many of us start young with credit cards*, and often it becomes a vehicle to spend MORE than what is coming in the next paycheck. And therefore, credit cards are a significant profit center for banks, of course at your (or my) expense. Here are some fun facts to give more color to the world of credit cards:

• About 75% of Americans have at least one credit card (data)
• Over 40% of American households have a balance on their cc, meaning they don’t pay it off every month, and pay interest to the credit card company.
• The average credit card debt in the US was $5,776 per borrower at the end of Q1 2019 (according to Transunion Industry Insights).
• This link has a cool map that shows you credit card debt by state, with Alaska the highest above $8,500 (why Alaska?? questions to ponder), and Iowa the lowest at $5,100.
• Men vs women, this link shows us that women usually hold LESS debt than men, $5,245 vs $7,407 for men.
• That link has LOTS of cool charts, also breaking by age bracket, showing 45-54 year olds hold the most at $9,096, and it declines for older age brackets, so 70-74 year olds have $6,465.

A random aside, as happens while surfing the internet, America is different from many other countries, in our attitude toward credit cards. Fascinating to know that in Germany, people prefer to use cash or online bank transfers, they abhor credit – some say due to cultural concerns about privacy and trust, and the role of the state (fascinating article on that mentality, if interested). So about 50% of Germans have a credit card, but only spend on average $158/year on credit cards, vs Canadians at $7,400 (more like Americans), and French spend just $300/year (also not super trusting of the state, and banks).

I digress, but fair to say Americans use credit cards, and many go into debt. And the frustrating part is that if you’ve spent more than you can pay off in a month, you get hammered in interest in paying over time.

• Let’s say you have a balance of $3,000
• The minimum payment for the month will be $90
• (credit cards calculate the minimum payment at 3% of the balance, or at least $25.)
• If you only pay the minimum payment, it will take you 10 1/2 years to pay off the balance!!!
• Assume the interest rate is 17% (also called the APR, annual % rate)
• The credit card companies calculate interest EVERY DAY, so they take 17%, divided by 365 days, add that interest to your $3,000….
• So day 2 it goes to $3001.40, then the next day they add interest compounded on THAT….so day 3 it goes to $3002.80!
• Hence the debt is constantly growing. When you finally pay it off, you will have paid $5,241 – waaaaay beyond the $3,000 you actually spent.
• Here is a super cool calculator where you can see just how long and how MUCH you pay on a credit card. Play with it. Scare yourself.

So just be aware! The point of all these facts is that credit cards can be a truly inefficient way to spend, if you carry a balance. There are so many cool travel awards and points rewards, and those are amazing – provided you pay off your balance every month. If you’re not able to do that, for your sanity, stop spending where you can. Don’t use that card. Start only paying in cash, or with your debit card. Work on paying off that credit card debt. You have a financial future to get excited about without debt!!!

*Footnote: As of 2009, Congress (with bipartisan support) passed a law called the CARD act, so anyone applying for a credit card has to be 21 years old, or have a cosigner, or proof of necessary income.