Will American credit card holders ever learn?
Our apologies in advance for sounding like scolds, but it's only been eight years since the Great Recession brought the U.S. economy to its knees.
You'd think credit card consumers would remember that near disastrous economic experience, but fresh data from CardHub.com show American credit card holders are digging themselves a financial hole they will likely struggle to get out of, especially if the economy slides back into recession, as some experts predict.
"Our end-of-year spending and payment results are in, and we did even worse than expected," CardHub reports in its 2015 Credit Card Debt Study. "Consumers racked up an astounding $52.4 billion in credit card debt during the fourth quarter of 2015. This significant build-up nearly equals the total amount added to our collective tab in 2014 ($57.4 billion) and leaves us with a $71 billion net increase in credit card debt for 2015. Consequently, the average U.S. household with credit card debt now owes $7,879, and Americans have surpassed $900 billion in credit card debt -- a mark last breached in 2007 during the ramp up to the financial system's 2008 collapse, the report states."
So why would card consumers risk so much debt only years after the Great Recession? Lots of reasons, actually -- with hubris among them.
"Americans overspent this holiday season more than they have in the past -- the tab per person was the highest ever at almost $806, and they collectively racked up more credit card debt in Q4 2015 than all of 2014," says Jill Gonzalez, an analyst at CardHub. "Another theory is that low gas prices and full employment across the country has led to an increase in consumer confidence."
Americans ended the year owing $917.7 billion to credit card companies, adds Gonzalez. "If they continue to overspend while allowing debt to rack up, the country will find itself in the midst of another recession," she explains.
Some credit card gurus say rising card debt is inevitable, and is a product of predictable historic trends. "Credit card debt is rising because it has always risen," says Skyler Irvine, co-founder at Myriad Real Estate in Phoenix. "Americans have not forgotten about the Great Recession. In fact, many are still living through it with stagnant wages and rising costs of everything from healthcare to iPhone bills."
But this debt binge could be harder for card consumers to overcome. "Before the recession hit, most Americans were able to pay down their credit card bills by refinancing their homes every few years," Irvine notes. "Today's credit card borrowers are renters with no home equity and no stock market participation."
"Consequently, if their wages do not increase and the cost of everything around them goes up, including their rent, then rising credit card debt has no where to go but up," he adds.
Others say one way out is via balance transfer cards, which can help lower card interest rates, if used correctly.
"Credit card debt is rising in the U.S. but there are solutions for it, and a balance transfer credit card is a great example," says Matthew Coan, founder for Casavvy.com, a personal finance website based in Gainesville, Fla.
But you need to take advantage of transfer deals before it's too late as they require a good a credit score to get approved, he explains. "They offer a free way to reduce your interest down to 0% APR for a certain period of time so that you can work with manageable payments to help eliminate your credit card debt."
Some credit experts say higher credit card debt is not entirely the American consumers' fault. "After the financial crisis began in 2007, average credit card debt began to decline and reached its lowest level in 2013," offers Rakesh Gupta, a money and finance professor at Adelphi University's Robert B. Willumstad School of Business. "But for the past two years, credit card debt has increased."
One of the major reasons for higher credit card debt is that costs of goods/services, especially medical costs, have gone up faster than household income, and people are using credits cards to pay for the difference, Gupta says. "But, there is also a behavioral reason -- more people have jobs and they have a rosier picture of their own economic future, so they are buying more stuff but on credit," Gupta says. "It is a well-known psychological phenomenon that memory of pain, financial or otherwise, fades quite quickly."
Gupta says consumers need to be adamant about spending less than they make and being sure to use their savings to pay down their existing credit card balance. If you're falling behind the credit card eight ball, take Gupta's advice to heart. If the U.S. economy does begin to slide into recession, you don't want $10,000 or more in credit card debt heading into it.
Especially if you made the same mistake eight years ago.