Credit Card Debt The Next National Financial Disaster?
Although we have been out of credit card debt for over 8 months now, I still greatly identify with the thoughts and feelings of having that debt be a seemingly inescapable part of one’s life. I spent more than 10 years tangled up in some form of credit card debt, after all, and those feelings are still ingrained in my very fabric. So when I hear or read something on the news about credit card debt and the people it affects, I instantly feel a sense of identification with it, even if it isn’t the place we’re at any more.
Yesterday evening, I was waiting for my weekly dose of indulgent TV (The Amazing Race) to begin, I had CBS on in the background while I was catching up on some internet-related work. Football went late, so The Amazing Race wasn’t on yet and I was semi-watching 60 Minutes while I worked. One of the stories was an interview with the head (CEO maybe?) of Bank of America. One of the questions the interviewer asked him and they discussed was if credit card debt was going to be the next big financial disaster, like sub-prime mortgages have been.
Hearing that made me start to wonder - why was credit card debt not the first big disaster? Were people paying their credit cards instead of their mortgages? I know I have heard mumblings and rumors to that effect, but I guess I never really thought it was accurate. We never got to a point where I was choosing which bill to pay - mostly because I was juggling the credit card debt back and forth between two cards when I could make the minimum payment (not a good strategy!) - but my rent (and eventually mortgage) was always paid completely and on time.
I do understand why someone might pay their credit card before their mortgage - the minimum payment is (usually) a smaller bill and if you don’t have enough money to pay the mortgage, you might still have enough to make the minimum on the credit card. Why be late on everything when you can pay a few things. But I have to think that paying part of the mortgage would be better than all of the minimum on the credit card and none of the mortgage. Maybe I’m wrong from a credit score standpoint, I don’t know.
Is credit card debt the next financial crisis? I don’t know, but if it is, I don’t want to be a part of it - and I hope that my readers can escape it as well if they haven’t already. If you still carry credit card debt, you too can escape it. Put away the cards. See what you can do without relying on them as a backup system. A little at a time, we can get away from using credit, and hopefully not contribute to whatever the next big financial mess is.
If you enjoyed this post, make sure you subscribe to my RSS feed!
You can also: Stumble It! Bookmark Submit to Reddit Submit to Tip'd
October 20th, 2008 at 6:42 am
Sometimes I wonder if many people even think of credit card debt as a problem. They may think of it as a fact of life–just one of those things like death & taxes that you can’t avoid.
When the value of a house drops below what you paid for it, it’s a little easier to perceive that you’re paying for air. When you’ve bought clothes and services on a credit card, you probably tend to think you got your money’s worth. Also, if you’re forced to move because of a job change, you can take the junk you bought on the credit card with you; not so a house, which instantly becomes a huge, expensive albatross hanging around your neck. So in a way it makes sense that people would default on mortgages before credit card debt.
As more and more people lose their jobs and can’t find new work, though, that may change: when you’re unemployed, it must look better to default on the Visa bill than to be evicted from your home, even if the home is relatively worthless compared to what you paid for it.
October 20th, 2008 at 9:48 am
I think credit cards are the next great financial issue in this country, but more so tied into student loans, and the low salaries for recent college grads. Many people like myself are still several years away from their graduation, but are still paying back the books they bought with credit cards, and other every day finances. I came out of school five years ago with a Bachelor’s at 21 with a good GPA, and I was barely making $22K at my first job. I made a career switch not related to my degree just to increase my salary, and I’m still paying off my debts.
October 20th, 2008 at 12:54 pm
Doesn’t it feel good to say…We are not in credit card debt anymore!
October 20th, 2008 at 1:27 pm
The mortgage crisis was likely the first (and probably only) for a couple reasons:
1. If you default on your credit card a few months, you’re facing additional interest, late fees, higher APR, perhaps collections. If you default on your mortgage payment for a few months, you’re risking being homeless, losing what you’ve already paid to a mortgage, losing equity you’ve built and losing any potential gains if you were to sell the house yourself.
2. Regardless of whether or not it’s “right” or a politically correct thing to say, the government listens to the middle and upper classes, and those with traditional families — and these people are the majority of the mortgage holders in the US. The government wants to take care of the people putting the most money in the government kitty –> the middle and upper classes, and big corporations.
3. Most people don’t have credit card debt in the hundreds of thousands (or even $100k). If the national average of credit card debt is something like $2k (this is a figure I’ve seen reported several places, though I don’t know the actual veracity of it), the national average of mortgage debt is certainly much, much higher. Thus, banks are losing a far greater amount of money when a mass mortgage default happens.
October 20th, 2008 at 1:31 pm
I think that IF credit cards are the next sub prime mortgages, we’ll see a much more gradually increasing default rate, rather than the sharp increase we saw when teaser rates expired for mortgages.
This, coupled with the fact that as far as I know, no one is securitizing credit card debt, will keep any problem in the credit card market fairly contained.
October 20th, 2008 at 1:40 pm
I don’t think most mortgage companies will accept partial payments, and thus the slippery slope begins….
This weekend Suze Orman said the we are going to become a “pay as you go” society now with credit so completely drying up. She has also pointed to how people are using credit cards just to survive, and the cascading effect of minimum payments on larger balances with credit card companies now systematically cutting back on credit lines. Folks end up maxed out, no credit left, and unable to pay anything.
Also, agree with Luke, but also see a real tragedy in how private student loans are becoming impossible to get. I can’t even imagine the long term consequences of all those students (plus those whose parents were going to use HELOCs to pay tuition) not being able to even go to college. THAT is a crisis.
October 20th, 2008 at 1:56 pm
Credit card debt is already a financial disaster, it’s just been overshadowed by the sub-prime mortgage mess. Why do you think we have so many sub-prime mortgages? Because there are so many people with horrible credit history, e.g., credit card debt. Frankly, I am hoping for a huge blow-up in the consumer credit industry so that consumers will stop obsessing about credit scores and think more about net worth and other positive metrics.
October 20th, 2008 at 2:19 pm
Like Jay says, we are a pay as you go society now. “If you borrow from tomorrow’s prosperity, you will have to go without for some time.” Can’t remember where that quote comes from, but it’s true. So many people (myself included) are living without (and much happier without credit cards) because we rang up debt so young.
Like our famous blogger writes though, it’s an interesting dynamic if people are not paying their mortgage to pay their credit cards. I brought this up to a co-worker and they said that they had a friend doing this…basically paying off his credit cards with his mortgage payment. He knows he can’t save the house, so he’s figuring protect his other open lines of credit. Not really a smart move, IMO, but interesting.
October 20th, 2008 at 2:25 pm
The reason people pay their credit cards before their mortgage is because mortgage companies will NOT accept partial payments. Also people will pay their credit card debt to keep their credit rating in a somewhat good position. It is easier to explain one bad debt than to explain many bad debts.
October 20th, 2008 at 4:30 pm
Agree with Mr ToughMoneyLove about *finally* let’s stop obsessing about FICO scores! They, of course, are tied into being able to maximize credit, so it’s probably going to become somewhat ethereal and irrelevant for most of us.
It’d be interesting to see the average FICO scores of last year vs this year vs next year…. my guess would be averages are falling pretty fast
October 20th, 2008 at 5:41 pm
Wow. I hope it doesn’t come down to that! That is a scary thought. I think credit cards are so dangerous for some people.
October 21st, 2008 at 9:08 am
Not only credit card crisis but think about all the commercials for car loans. I am still seeing the car dealers pushing 0% down, low payments, extending credit et cetera. I think we will also see the car finance industry get shaken a little as well. I’ve already seen the repo man in my neighborhood about once a week looking for vehicles. The sad part is, I live in the nice part of town where people should not be having these problems.
I recently read an article talking about how this crisis will force us to go back to frugality. The wonderful times of over extending ourselves are over etc. However, I do not think this will change. The sea will settle and we will all [as a nation] go back to our over spending, and over extending ourselves on credit. Some of us will learn the lesson, but many of us will be doomed to repeat history.
October 21st, 2008 at 3:06 pm
Completely agree with your point about minimizing the use of credit card. Credit card debt is definitely a big issue. I think a few reasons caused the housing market to burst before credit card market: (1) The dollar amount is bigger (credit card limit of $5k vs. loan limit of $250k) (2) speculative behavior on the part of real estate investors which artificially inflated the market home price (3) Like many mentioned, the mortgage payment is larger than credit card minimum payment; and lenders don’t take partial payments (4) Lending practices allowed too many people who probably shouldn’t have qualified for the loans to start with to qualify for the loan. This combined with the large loan amount equals trouble.