A Macroeconomic Look at Credit Cards

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Ok, if you’re reading this, you probably agree that credit cards are bad. After all, we’re in debt more than ever, and only now that our economy has tanked are we starting to realize that it’s imperative to get rid of our debt. Personally, I’m down to slightly more than $2k. I’ve found there is no easy way. No amount of snowballing, snowflaking, etc. can replace the simple idea that you have to either make more money or reduce your lifestyle in order to pay off debt quickly. It has humbled me. However, I propose that credit cards are actually mathematically dangerous at their core, not just due to bad behavioral patterns.

The primary reason that credit cards are evil is simply that they are a gamble at best. If you do not have money to pay for something today, then you are betting that five years from now, you will have the money. And in the meantime, you reduce your monthly spending power by a minimum payment. The combination of these two is dastardly; you will simply never be able to save enough money to pay the cards off while paying the minimum payment every month. This is a simple concept to understand, because how else would creditors make money? They prefer you to keep a balance, making those minimum payments until you die. Even with the new laws requiring principal to be paid off each month, it still takes years to recover from a single purchase. Yes, you might have bought that laptop on sale, but you spend eight years paying it off? Not smart. And it’s not only your fault; it’s how the very industry is set up.

So, what’s wrong with thinking you’ll have more money tomorrow than today? Well, for starters, check out our economy. You might not even have a job tomorrow! A close second is that mathematically, we simply don’t make more money, despite raises. Here’s a look at it using college macroeconomics…

United States GDP (per capita) only increases an average of 2% each year [source]. Now, that is actual economic growth per living person, adjusted for inflation. This means that unless you are in an industry of uncommonly high growth, you can expect to have an income increase of a maximum of 2% each year. In actuality, that percentage trickles down from the CEO, so you might be left with 1% growth at best. Unless you do something like get a degree, change careers, or get a promotion, you simply won’t have more money next year than this year. And thanks to the trillions of dollars in bailouts (inflation fodder), you will probably make less money this year than you did last year!

On the other hand, credit cards charge an average interest rate of 14%. This means that over the course of a year, you get charged 14% to use that credit card. Meanwhile, you make 1% more money. You’re doing 1% better, but paying at a rate of 14% extra! That speaks for itself. Now, if you only have a few hundred dollars on the card, that 14% may work out to equal the 1%, and you might be able to pay it off. But for many people, they hold half their annual salary on those cards, meaning it’s still seven times greater than what you gained in income. Add in the factor that people with that much debt typically have greater than 14% interest, and the situation clearly worsens.

Thus, credit cards are not a sustainable system. And this is part of why we’re in this economic mess today. Some people are able to not get trapped; either they don’t get too far in debt, wind up changing careers or making more money, or happen to be in a lucky field that makes more than the average GDP growth. But, for every industry growing faster with respect to GDP, there is an industry or two that is growing slower than the average GDP. This means that some people aren’t even getting that 1% increase each year. Some people don’t even get an increase equal to inflation!

If you still carry credit card debt, get started today on eradicating that junk! You will have to decrease your lifestyle, pick up second jobs, find things to sell, etc., but the freedom is worth it! It has been incredible to see those dollars gradually roll away, and actually have more discretionary income to use once those cards get paid off! That sense of freedom is totally better than the coolness of having a new TV paid for with a credit card. 

Look, we all want cool things, but seriously, save for them. If you can’t afford it by saving for it, you definitely cannot afford it by using a credit card. I hope I showed you how mathematically unsound they are in terms of economics. Yes, you might be one of the lucky ones who are able to use them without getting trapped, but it’s a gamble. Like a casino, the house always wins.

5 thoughts on “A Macroeconomic Look at Credit Cards

  1. I have to disagree. Credits cards are all benefit and no downside to me:

    1. convenience – I do not not have to carry cash around with me (especially useful when travelling)

    2. they provide perks – discounts in some shops, points which can be used for somethings

    3. better cash flow – I can defer paying for my purchases for about a month on average. The interest I earn on that money isn’t much these days, but better than nothing.

    Needless to say, I pay off my balane in full each month. If people choose to carry a balance and pay the really outrageous rates of interest, then it is not the credit card which is bad but the user. Saying the cedit card is bad is just like saying cars are bad because people die in road accidents.

  2. That is a good point. Perhaps it is better to think of a credit card not as “inherently evil”, but rather a weapon, like a gun. Guns can be used to do very evil things, but a nice chunk of venison sausage says it can also be used to do very tasty things! :)

    However, I think most credit card users fall on the “bad usage” side of the scale, and it’s not all their fault. While we would love to think every consumer is responsible, the credit card companies have been purposefully deceptive in how they use marketing, especially targeting the college-aged generation that cannot afford to pay the cards off because they have no money. It seems to be a rare consumer who has used credit cards responsibly their whole life. They exist, and I think it’s awesome, but for the rest of us, we should probably regard them as evil for the time being. Once we get our financial know-how in order, we may be able to use them more responsibly.

    Great comment though! I normally post the other side of things, but CCs have almost ruined me so I have an obvious bias right now. :)

  3. Hi David

    I agree that there is a world of difference between the credit card and the credit card companies (and certain other lenders – it’s not just credit cards that cause problems) who promote getting into debt as a lifestyle choice or who lend to people who clearly lack the means to service the loan.

    Cheers
    traineeinvestor

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