Credit cards a bigger issue than inflation
Here we talk about the parasitic vultures of the financial system
Last week, inflation hit 7.9%, the highest in 40 years. I actually remember when inflation was 13% in 1981 and home mortgages reached 18.45%. 1981 was a difficult economic time, far worse than today.
The problem with inflation is it eats into savings and buying power. Your money is losing 7.9% right now in “real” (vs “nominal”) terms. If inflation continues at this rate, your current salary will be worth half as much in buying power in 9 years (or you have to increase your salary by 8% a year, just to stay even). Same with your savings: cash underneath your bed or in a savings account, is going to be worth half in 9 years (or you have to get a 8% return in the stock market just to stay even). Welcome to the power of compound interest.
So yeah, inflation matters.
But you know what matters more? Credit card debt. Credit card companies are the parasitic vultures of the financial system.
Scary stats about parasitic vultures
Only 13% of Americans pay off their credit card each month. The other 87% carry a balance.
More than half of Americans (62%) said that their credit card debt increased compared to before the global pandemic began.
70% of Americans are using credit cards to buy what they want, not what they need
65% of Americans are using credit cards to buy things they currently do not have funds for. (source for last three stats)
The Problem
Credit card debt carries about 20% interest. In other words, any credit card debt is inflating at 20%. Inflation may be halving your net worth every 9 years, but credit card debt is halving your net worth halves your net worth every 3.6 years (For compound interest nerds: rule of 72 calculator).
If 87% of credit card holders are carrying credit card debt, and most of them for buying things they don’t need, well, you see the problem. And why credit card companies are so profitable.
I’m guessing that 87% of my readers don’t carry credit card debt. I’m also realizing, based on these statistics, a fair number of you probably do.
The psychological burdens of debt are so damaging. It restricts your choices, your agency, and your ability to be self-willed. If you are in debt, you literally owe your future life hours to someone else. And a credit card company or large financial is making money off of your life hours to do things you probably don’t agree with. Debt is literally the opposite of financial freedom: it’s financial servitude. The sole purpose of all financing—mortgages, student loans, car loans, credit cards—is to get people to pay for what they otherwise could not afford. Just think about that each time you take out debt.
On a practical level, if you have debt, getting to zero debt is far more important than putting any money into investing. The one general exception is mortgage debt. (A long topic covered in FF1). If you have any debt other than mortgage debt, here’s a great summary on how to get rid of debt by Portland’s own JD Roth. It details the emotional benefits of debt reduction and offers three different techniques (debt snowballs, debt tsunamis!) for organizing and paying off your debt.
BOTTOM LINE: Inflation is worrying. If you, with the vast majority of Americans, are carrying credit card debt, your credit card debt is far more worrying.
RESOURCE: A spreadsheet that helps you track your debt snowball.
POSTSCRIPT 1: I dislike credit card companies so much that I’ve testing spending on a cash only basis. I don’t care about points or miles. Did you know that, on top of the money they make on debt, the credit card company takes 2.9% every time you purchase something on your credit card? In other words, your vendor is losing 2.9% to the credit card company. Every single transaction the credit card company makes 2.9%. I don’t want to give them that.
POSTSCRIPT : I dislike credit card companies so much I created the Jubilee Fund, which turns debt into donations, debtors into donors. If you dislike global transnational corporations, slowly stop using your credit card.
Your thoughts when it is justified to ask your future self to pay something that your current self wants? Where do you draw the line? Would love your thoughts and comments below.