The Burden Of Debt

Credit Card Debt Hits An All Time High

Consumers racked up $67 billion in 2018, displaying a tendency to over-borrow and spend frivolously

New study from measures the depth of consumer debt and the attitudes surrounding it. Reprinted with permission. Visit here.

The personal-finance website WalletHub today released its latest Credit Card Debt Study, which found that consumers racked up $67 billion in credit card debt during 2018, sending outstanding debt to an all-time record high. WalletHub also released its nationally representative 2019 Debt Survey, which highlights consumers’ feelings about over-borrowing, including the fact that 156 million Americans admit they’d go into debt for frivolous purchases.

The debt picture is worrisome nationwide, but some areas have bigger payment problems than others. WalletHub also compared the amounts owed to credit card companies by people in more than 2,500 U.S. cities – specifically, how those balances changed in 2018. You can find a handful of highlights from these reports below.

Cities with the Biggest Debt Increase Cities with the Biggest Debt Paydown
Huntington Beach, CATempe, AZ
Denton, TXWest Valley City, UT
Springfield, ILNorman, OK
Murrieta, CAHigh Point, NC
Wichita Falls, TXNew Bedford, MA
San Mateo, CAYakima, WA
Germantown, MDMiami Beach, FL
Greenville, NCChampaign, IL
Newport Beach, CASanta Fe, NM
Hoover, ALWarwick, RI


Key Findings:

The bill will come due for Millennials
Young people are 35% more likely to go into credit card debt for frivolous purchases than people age 45+. “One of the things that has happened over the last 30+ years is that American consumers have become much more accepting of having debt than previous generations,” Kevin Jacques, chair of the finance department at Baldwin Wallace University, told WalletHub. “Many people view debt, in general, and credit card debt, in particular, as a last resort.”

Billions in debt beats political gridlock
Nine in 10 Americans say their personal finances are currently run better than the federal government. 3X more Democrats than Republicans think another recession will happen within two years.

“The turmoil in the government and the scandals offer a frame to people in assessing their own financial situation and they rationalize,” said Demetri P. Tsanacas, a professor of business at Ferrum College.

Millions would bare-all before exposing their finances
Overall, 1 in 5 Americans say they would be more embarrassed by financial nudity than physical nudity. Women are 54% less likely than men to be embarrassed by people seeing how much credit card debt they have.

Desperate times breed desperate measures
More than one-third of people (36%) say they would do anything to get out of credit card debt. Millennials are 4X more likely than baby boomers to agree to house arrest for a year in exchange for credit card debt freedom. They’re also 2X more likely to leave the country.

“People are desperate to get out of debt because it causes a lot of stress. Education in the first step, realizing that you have a problem and that you might need help,” said Francis Reyes, an assistant professor of economics at Western New Mexico University. “Most of the time, I ask people to list all their debts from smallest to largest, then work on a budget. Living below your means is challenging for most people, but once you know where you stand you can take small steps towards setting achievable goals.”

Balance transfer offers are still attractive
The best balance transfer credit cards currently offer 0% APRs for the first 15-21 months with no annual fee and balance transfer fees as low as zero. Such deals likely will not be around for too much longer.

“Getting out of credit card debt requires, more than anything else, discipline. And the high interest rates on credit cards makes that hard to do,” said Kevin Jacques of Baldwin Wallace University. “One option is to look for a credit card that has either a lower interest rate, allows for a significantly lower rate on a transferred balance, or both.”

Expert Commentary:

There is a general resentment towards the way government uses funds … but personal finances are not run better than the government. I think the main difference is the sense of control...

We’ve got a problem and we know it, but there are bigger fish to fry right now. That’s the sentiment being expressed by a majority of Americans at the moment, according to new research from the personal-finance website WalletHub, as we continue to both set new credit card debt records and point fingers about who is really to blame. After adding $67 billion in new credit card debt to our tab in 2018, U.S. consumers began 2019 owing a total of $1.03 trillion to credit card companies, according to WalletHub’s Credit Card Debt Study. We’re on pace to add another $60+ billion in credit card debt during 2019, too.

Despite this pattern of overspending, which barely missed a beat following the Great Recession, 9 in 10 Americans believe their personal finances currently are managed better than the federal government, according to WalletHub’s nationally representative credit card survey.

Why? The contentious political climate clearly has a lot to do with this sentiment, but not everything.

“There is a general resentment towards the way government uses funds … but personal finances are not run better than the government. I think the main difference is the sense of control,” Francis Reyes, an assistant professor of economics at Western New Mexico University, told WalletHub. “People might think that they have a say on their personal finances, while they feel that they are not part of the process of deciding the allocation of resources at the federal level.”

For many, desperate circumstances necessitate desperate measures. Some people also seem to have a dependence on debt that’s bordering on addiction. Others simply may not grasp just how debilitating of an effect significant credit card debt can have on our finances, both personally and as a nation.

Otherwise, it’s difficult to justify how more than 6 in 10 people could admit they would go into credit card debt for “frivolous” purchases, as the respondents in WalletHub’s survey did.

Frivolous Credit Card Use

“Credit card use for frivolous purchases is a habit that you develop over time; you have done so for a long time and you got used to it,” said Demetri P. Tsanacas, a professor of business at Ferrum College. “Old habits are hard to give up.”

There may be a silver lining, however. At least people are being open about their personal finances, which is not always easy. For example, 21% of WalletHub’s survey respondents said they’d be more comfortable baring all physically than exposing themselves financially. And that figure jumps to 30% among men.

People with credit card debt also seem eager to do whatever it takes to change their circumstances. In fact, more than one-third (36%) say they would do anything to get out of the hole. Now, that might be going a bit too far, but it’s the thought that counts, right?

A Dangerous Mindset

“It is a very dangerous mindset,” said Sahar Bahmani, an associate professor of economics at the University of Wisconsin-Parkside. “For those who are struggling with credit card debt, you have to be very mindful of the fact that you should and need to be saving regularly.”

Still, it’s good to see some urgency in addressing this topic. More than 9 in 10 people say they are at least one year away from debt freedom. That timeline could get a whole lot longer if the economy takes a tumble first, however.

For one thing, balance transfer offers are about as attractive as they’ve ever been, capable of saving consumers hundreds of dollars in finance charges and helping them get out of debt much sooner. But such offers largely disappeared during the Great Recession. Furthermore, an economic disruption could make everything less affordable, leading to increased delinquency rates and a downward spiral of financial pain…if we’re not careful.

“Where the problem arises is when borrowers accumulate large credit card debt they can really not afford during a period of economic growth, and then suffer a job loss or reduction in income during a recession,” said Kevin Jacques, the Murch Chair in Finance at Baldwin Wallace University. “My advice is that while the economy is growing, develop a step-by-step plan as to how you are going to get out of credit card debt. Stick to that plan and recognize that you may be vulnerable should a recession occur. Plan accordingly and in your step-by-step plan, decide how you would continue to work to pay off your credit card debt should you suffer a loss or reduction in income.”

So, make getting out of debt and adopting sustainable spending habits top priorities now. Your wallet will thank you later.