The great depression, which the U.S witnessed in the 1930s, ruined a lot of families financially. The financial tsunami which hit America a couple of years back also affected millions of people. However, there is a basic difference between the two economic meltdowns. The plastic cards wrecked havoc on our finances during the recent financial recession. This was something our grandfathers did not witness during the previous depression.
The Americans have become too much addicted to spending these days. They are racking up debt to maintain a life style that is beyond their means. Therefore, it is not surprising that the total credit card debt in the U.S is $886 billion (as per data from the U.S census bureau). Do you know that an average card holder has $5100 in credit card debt?
There are certain myths associated with credit card debt. Many of them are quite baseless. Here are a few of those myths:
1) Consumers always managed everyday expenses with credit cards
A few retail chains such as Sears and Montgomery Ward had credit card system in the 1960s to buy goods from their stores. But it was not possible to use those cards anywhere else. So there was no option to use that card extensively. Moreover, Vista and Master cards were usually restricted to the upper-middle class and upper class families with high income. These cards were rather a status symbol. The trend changed in the late 1980s. So it cannot be claimed that our grandparents paid their grocery bills with credit cards like we do.
2) Responsible card holders suffer for unwise card holders
A lot of people believe that high default rate due to unwise use of credit cards has resulted in soaring interest rates. As a result even responsible card holders need to pay high interest rates. However, they overlook the fact that it is mortgage foreclosures and home-equity loan defaults that affect the banks the most.
On the eve of the financial depression, the banks made it easy to open new lines of credit. Therefore, more people got access to credit cards and consequently, credit card debt increased. The banks advised these debtors to refinance their mortgage. This move by the banks backfired as they could not sell the low quality assets during the recession. The banks had to increase the credit card interest rates to support themselves.
3) The CARD Act completely shields the consumers against unscrupulous practices
The CARD Act has banned malpractices like some retroactive interest rate increases, free credit card marketing to minors etc. Nonetheless, this bill is not going to work for people who are already in debt. The credit card companies have already pushed up the interest rates, hiked service fees and lessened the value of loyalty reward programs. As a result, the debtors are in the same mess. Also, the borrowing costs have already skyrocketed. This does not help the indebted people either.
The good news is that consumer debt, though quite high right now, is showing signs of decline. Statistics from the Federal Reserve reveals that consumer debt dipped by $155 in December last year. Perhaps the consumers are realizing that being wise with the plastic cards is a basic condition for a financially secure future.
Author Bio
Marc Brown is a content developer and a financial advisor. He writes on a wide range of money related topics with a special focus on credit card debt. You can visit Marc’s blog to read more articles by him.
