Why do so many Americans carry balances on their credit cards? I read that the average household has over $8,000 in credit card debt- and I’m sure the interest rates they’re paying are very high. Why do they do this?? Do they lack self-control???
The math is simple enough for anyone to understand. If you wait until you actually have the $$$$ BEFORE buying something, it would be MUCH cheaper than running up a balance on a credit card (think: delayed gratification). Why can’t people wait until they can afford something before they go out and buy it? Can’t they do math?
I’m guilty of this, too. I ran up about $1,700 at 14% before I realized how badly I was getting screwed. I just paid it off last month. I will NEVER do that again!
Beats me. Obviously, if you have no choice but to go into the red - to buy essentials when you’re out of work, say - you’ve got to do it. A consumer loan of some sort would be far cheaper, but I guess banks don’t like to lend to people in that situation.
Lots of the people I know who are paying ripoff interest rates on credit card debt are in work but simply lack the willpower to save before buying things. Can’t say I have much sympathy for them.
In many cases, it’s people that don’t understand how much it really costs to buy something on credit. It’s frankly amazing how clueless some people are when it comes to finance.
Having said that, it possible to use a credit card responsibly (even wisely). For example, some people will use a credit card to make a large purchase, then pay it off over a couple months. This way they can buy something that they normally couldn’t afford to buy and the interest that they pay is nominal (if they pay it off quickly). Also, anymore it is possible to get cards that have a pretty low interest rate. There is nothing wrong with buying something on credit if your rate is low enough. A friend of mine recently bought a car and paid cash. He was all proud of himself for having “saved the money on interest”. Only problem is he took the money out of a mutual fund that has averaged almost a 14% return over the last 5 years in order to “save” that 2.9% financing.
I really think personal finance should be a required high school class.
Well, I’m carrying about 8000 in debt on credit cards. I have 2. One has my wedding expenses…and I had a very cheap wedding, all things considered. Also, when we moved from home, we didn’t have any money or a job. So I took out a 3000 cash advance…the interest is huge, butit was that or be homeless. My other card has mainly flights on it…I had to travel a lot last year. It also has my college books…those things are expensive!!
As far as self-control goes, I haven’t made an actual purchase on either card for nearly ayear.
You think credit cards are bad? My SO’s acquaintance ran up about 5,000 pounds (say $7,500) on various store cards, with APRs in the high twenties. And she worked for a bank!. That just redefines ‘mind-boggling stupidity’ in my book.
I agree. I have thought for a long time that there should be some kind of required course in highschool on personal finance management. I would have liked knowing that it’s necessary to balance a checkbook before I actually had a checking account.
It’s one thing to put your wedding expenses on your card (congratulations by the way [B[pepperlandgirl**, even if your wedding was years ago, my first knowledge of it, so congratulations are in order), but some people just don’t know how to put off instant gratification.
I have virtually nothing. I live in a shitty apartment that I never bothered to buy furniture for because I just don’t care about it. I know it was temporary, and thus, there was no need. My t.v., playstation, even bed were all things given to me by friends who were moving away or had no need for them. Most of my money gets spent on buying lunch and dinner.
But then I look at my friends who have PS2s, Gamecubes, Dramcasts, DVD players, and a library of DVDs and games, and I think “Okay, I work two jobs to your one, I work twice as much as you, earn more money than you, and I can’t afford a sixth of the stuff you own, how is that?” And then I realize it’s because they have over $1,000 in credit card debt and I am completely debt free. So, overall, I feel I’m the lucky one.
But basically, they don’t think of it as spending. You get what you want now, “pay for it later,” and don’t think about it in the meantime. Gotta love capitalism.
I got my first credit card in college. It was for $600. I used it for college books, like pepperlandgirl and it took me forever to pay it off. The highest ours ever went was $3000. Part of it was necessity. We moved to Texas after college, were dirt poor, and it was going to be three weeks before I got my first paycheck. All our remaining money went to apartment/electricity/etc. We had to use the card just to buy groceries.
For the last three years, we’ve had $0 credit card debt. In fact, we only recently started using a credit card at all, to make all our online purchases (after a problem with our old ISP deducting 4 months worth of DSL service from our checking acct. in two days time). I pay the bill off every month.
I agree that it’s mostly an impatience to wait for the things we want rather than anything else. Even when most people are confronted with the math, they don’t have the willpower to stop using the things.
You’re right, they can’t do the math. I agree that it should be a required course in school.
Nobody ever explained interest rates to me; fortunately I’m a huge tightwad.
About twelve years ago I amassed a huge (to me) $1,200 credit card debt, partly due to an expensive plane ticket. That was wayyyyyy to high a balance for me to live with comfortably, so I sought a consolidation loan from my parents. My dad and stepmother wanted to charge me 9% interest, claiming that was what they would be earning on the money otherwise. I was shocked! This is when the lesson of interest rates got driven home to me. My mom wanted to lend it to me without any interest, but we compromised on 2%. I took her off, repaid her loan on time, and have never carried a balance since, even when I’ve bought expensive plane tickets. I also put away a truckload of money into mutual funds, etc. Woo-hoo, it feels great to be on top of your finances!
hey, surreal! you claim you had a $1700 balance recently. Answer your own question. Why did you do it? Did it seem stupid at the time? Would you ever do it again? Ever had unexpected medical expenses?
Try this math: lets say you have a $8000 balance with an interest rate of 1.9%. You have a $60000 CD earning 3.4%. Do you cash in the CD to pay it off?
as far as your thoery of waiting till you have the money to buy something, its a dead givaway that you live in your mommy’s basement! After all, you are obviously smart enough to understand that that home mortgage for the $100,000 home will cost you well over twice what the place is worth when all is said and done.
Fools know the cost of everything and the value of nothing.
I don’t have credit card debt.
However, I just wanted to say that I could tell by the thread title
who authored the OP!
Anyway, I guess the short answer would be
“because they do.”
I can see myself as someone who would rack up thousands on my credit card. I’m a shocking impulse buyer - keep that credit card far, far away from me! But I’m also a tightarse … I’m not sure which impulse would be stronger. ponders
And gatopescado, I have to admit, mortgage is one thing I’m terrified by. I see those advertisements where the bank tailors the mortgage for you and you can save $80,000 or so. I sit there and think: OMG! $80,000! :eek:
gatopescado- “hey, surreal! you claim you had a $1700 balance recently. Answer your own question. Why did you do it? Did it seem stupid at the time? Would you ever do it again? Ever had unexpected medical expenses?”
I had just gotten a card with a higher limit, and I bought a few things without thinking through the consequences. When I got the bill, I realized it was a big mistake, so I paid it off and fixed the mistake. Live and learn!
No, I haven’t had unexpected medical expenses, probably because I’m very healthy, and I attribute this to the fact that I am not overweight like some people (think: MOST Americans). I doubt that unexpected medical expenses are the reason so many Americans have credit card debt.
gatopescado- “Try this math: lets say you have a $8000 balance with an interest rate of 1.9%. You have a $60000 CD earning 3.4%. Do you cash in the CD to pay it off?”
First of all, I think it would depend on your income tax bracket.
Secondly, why would a credit card company lend money to an individual (think: HIGH risk) when they could lend it to a bank (think: LOW risk) and get a higher return? In other words, the hypothetical makes no real-world sense and therefore adds nothing to this discussion.
I know a couple who racked up over $50,000 on 5 different credit cards. They were both working full time jobs and have only one child. They racked up the debt because they just couldn’t wait to have a bigger t.v., a better vcr, a nicer entertainment, newer furniture, a new bedroom set, etc., etc. They contacted one of those credit management companies and have been paying $500/month for the last 4 years to pay them off. They still have two years to go.
I have one credit card with a $600 limit and I’m carrying about a $500 balance now but that’s wedding expenses and I bought some stuff while we were on our honeymoon. It will be paid off in three months though so I’m not too worried about it. I’ve learned that if I can’t pay for it with my cash on hand… I don’t need it!!
I think the thinking is – hmm, $400 for that “must-have” item.
Can’t afford it. Damn.
Wait, if I put it on the credit card, it’ll only be like, $20 a month! I can swing that! ka-ching
You only need to do that a few time before you’re saying, “monthly interest charge – $267!!!”
I just paid off my last card last week. I carried a balance for years – I don’t even want to think of how much money I gave to those #$%^#$s.
nothing hypothetical about this! this situation exists! To oversimplify- by puting your cash in a higer return investment and sacrifice some liquidity, you earn the differance in interest cost vs earned. (in our little example, 1.5%)
…and being in excellant health has nothing to do with unexpected medical bills. I have a buddy who is fit like an olympian, but if he tripped and fell and broke his collarbone, he would have to file bankruptcy, cause he couldn’t pay the bill and doesn’t have insurance!
(collarbone is a bad example-- they tell you to lie flat and not move around too much, then send you a massive bill. Hell, I was lyin’ flat and not moving before i went to the damn hospital!:D)
About 7 or 8 years ago, we had a go at our own business. I kept my job and hubby partnered with a friend in the endeavor. The credit cards became our supplements - whether for car repairs or groceries or let’s-go-out-to-dinner. The business failed, hubby has since gotten another job, and we’re still paying off the credit card debts. Luckily, our credit union only charges 8.9%.
Not the smartest financial decision we ever made, but in the end, it’s only money. Soon the cards will be clear and we’ll only charge what we can pay off the next cycle. At least that’s the plan.
Please don’t be stereotyping people based on their credit card debt. Sure, there are people who are wasteful and buy things they don’t “need.” There are also people who lose their jobs and have little kids, like my parents when I was little, who have nowhere else to turn and put it into their financial planning to rack up debt on their cards.
I graduated from school in December and went right into starting my own business. It’s taken us until just yesterday to get the business started - there’s a lot of processes to go through. I put about $3k on my card personally, $2k on my card for the business, and another $1k as a loan for my brother. Now that the business has gotten up to speed and I have $1k paychecks, I can pay everything off. (and have been paying off $1000 at a time, but then spending more on the company.) To top it all off, I had had the card for 3 year prior to graduating and never missed a payment and always paid in full. That raised my credit limit a lot and lowered my interest rate to 9.9% (they wanted so badly for me to pay interest.)
As I see it, i’m not stupid and not a poor planner. I knew I had big paychecks coming, but I had to get the business together first. I didn’t want to live like I was poor and I didn’t see the need to do so when in theory I had a lot of money coming my way.
Plus, now I’ll have a good credit rating because I’ve proven that I can handle paying off the card in full, paying large balances, and keeping large payments coming through. And i’m only 23.
