Credit Cards are so frightening. I remember having to hide from my Mom that I had gotten one when I was 18, because she was so scared I would ruin my life with it. Of course it's done the opposite.. I've built credit and saved lots of money in doing so, but I do get her fear.
These cards are accepted by society because they benefit those who know how to use them, but it's hard to look past the fact that so many people, if not most, are financially illiterate (because of failings of education due to lack of funding) and so many people screw themselves financially for decades if not their whole lives because of them.
Part of me wonders what the world would look like if we massively regulated credit card terms, like no more than 5% APR. Of course I wouldn't get my 3% cash back for being a responsible user of my card, but we also wouldn't be screwing people so hard on the other end. We can say "but they signed the terms!" all we want, but we all know that people agree to things that are a detriment to them and the world for short-term gain. Regulation should be there to prevent that as much as possible.
>>Part of me wonders what the world would look like if we massively regulated credit card terms, like no more than 5% APR.
What would happen is there would be no credit cards for anyone. Nobody is going to lend money to the general public at 5% for unsecured debt.
IIRC, they used to be capped at 18% many years ago, still high, but much more reasonable then some of the rates that are out there now; so not opposed to a cap, but it can't be so low that it kills the business altogether.
People should only be borrowing money to spend on productive capital. If you're not investing borrowed money into something more profitable than the interest, what you're actually doing is falling into a hole. We should be helping people who are falling into holes, not exploiting them.
What there really needs to be is a lifetime payback cap. 20% interest would be fine if you had say a maximum payback amount of 2-3x the original amount adjusted for inflation. The companies can still make money, but it prevents a hole with no bottom.
> What would happen is there would be no credit cards for anyone. Nobody is going to lend money to the general public at 5% for unsecured debt.
Credit cards are a single product that serve a lot of different use cases simultaneously, and credit card issuers are able to profit off of most of those through different mechanisms. Not everyone carries a balance on credit cards, including some of the most lucrative market segments[0].
Furthermore, BNPL is an example of lending money to the general public at 5% (or less, in many cases) for unsecured debt. In that case they make their money back on fees for late payments.
> These cards are accepted by society because they benefit those who know how to use them, but it's hard to look past the fact that so many people, if not most, are financially illiterate (because of failings of education due to lack of funding) and so many people screw themselves financially for decades if not their whole lives because of them.
I went through the U.S. education system in 8 different states in schools in poorer areas, and even then, the education was sufficient to understand the concept of not spending money you do not have.
Set the thing to auto pay the balance every month, and do not spend more than you earn. I expect that much from the 95% of the population that has had the opportunity to learn how to read and write.
Almost everyone in the U.S. spends money they don’t have. We borrow to buy a car, a house, to go to college. When one does not live on the precipice of missing rent and whatnot it is easy to say, “ Don’t spend money you don’t have.” Such advice is as useless as it is easy to say.
> the education was sufficient to understand the concept of not spending money you do not have
My public schooling in a podunk county TN had no component for financial management.
Even so, you assume that such education exists in a vacuum. It does not. It runs counter to a deluge of culture and advertising that tries to induce people to go into debt the moment they are able to pass a credit check.
I think the factor of financial literacy is overstated. I think the biggest factor is self control and addiction, mirroring a lot of other issues we see, EG obesity.
As an example, I have a friend who is really struggling with credit card debt, but they are in no way financially illiterate. They have an accounting degree and work in finance.
It is extremely sad to watch them suffer because they know exactly what's going on, but they can't control their spending habits. I think this is a more common situation than the alternative.
I agree with this. Most people that abuse credit card debt know the ins and outs of every bylaw on credit cards, they just… need the money and don’t care about their credit rating.
And much like weight gain, the propensity for buying things varies from person to person.
Some don't need much, others will always or almost always spend more than they have, but traditional financial advice will be the same for both groups.
This is real. I approach these conversations based on if the person would be open to learning the same way I avoid religious and political discussions.
It is a deeply emotional response from most people, they know what they are doing is stupid. They almost never need me to tell them.
My mom was an accountant and she looked flabbergasted when I told her her $2k/month timeshare was costing her $24k/year, sucking up almost all of her social security.
"(because of failings of education due to lack of funding)"
I think there are other reasons for the failed education. Even with more money, I doubt they would prioritize it. Most schools offer personal finance as an elective. It should probably be part of the core curriculum. Even then, you will have students that are unintered or don't apply themselves.
The easy fix is to reign in the lending by setting low limits that only increase with good payment history and cap lifetime interest payments as an percentage of the original purchase, like 200% adjusted for inflation.
Want a credit card? Here's one with a $250 limit. Didn't pay it back? Now you'll owe $500 adjusted for inflation, and you can't get another card or more credit unless this one is paid back.
The political/legal ability to do this is more questionable.
Anecdote, but I was required to take an economics class in high school with the basic one being consumer economics which taught me all about personal finance.
Everyone has to avoid getting screwed until a pile of CC debt. While refusing to own one isn't my personal plan, I appreciate people like your mother. She sees the downside as >>>> the upside, and just swears off the entire thing.
Day to day, the only use of my credit card is just buying stuff online - so when my # gets stolen, my money isn't taken out of my bank account (like it would be if I used a debit).
We need more basic financial education in the US and probably the world.
I know people some people with thousands of dollars in credit card debt.
Currently I make about $50 a month in credit card rewards and after using them for 30 years I have never paid a penny in credit card interest. I looked at the credit card interest rate and it just seems ridiculous so I just don't buy things I can't pay off at the end of the month.
I know that most of the financial institutions purposely advertise and try to deceive people into going into debt so they can make more money from them.
I know that people run into difficult times but I see so many people buying things they don't really need with a credit card.
> We need more basic financial education in the US and probably the world.
We do, definitely. However wouldn't that also produce the same result as regulating the cards?
Ie i imagine cards are profitable for the responsible folk because they so heavily abuse the irresponsible and/or uneducated folk. If we were to educate everyone then the cards wouldn't exploit "anyone" and suddenly the card makers have no incentive to offer the profitable cash back/etc.
Now of course, we can't educate "everyone". And i'm not a fan of systems that build themselves on the back of the exploited.
> These cards are accepted by society because they benefit those who know how to use them
No, they're accepted because the only way we can figure out how to continue economic growth is through a massive credit system. This means doubling down on a strategy of infinite growth as that is the only way such a system is sustainable.
Cheap money coupled with expanding credit is the foundation of the global economy for the last decade. You could also argue pretty easily that cheap money is just another view of expanding credit.
If we increased the cost of money and reduced the amount of consumer credit available the global economy would collapse. Ever since the GFC we've pushed off collapse only by expanding global debt.
5% on unsecured debt? Absolutely no one would offer credit cards, period. They wouldn't exist. I'm not saying a lower regulated rate couldn't work, but it would be to be considerably higher than 5%.
You get almost 5% at the moment by lending money absolutely risk free to the US government. OP is living in a fairytale if he thinks anyone would lend to random people at 5% with no collateral.
I've always hated this "caveat emptor" mentality. It just assumes the seller can't be blamed out the gate, no matter how manipulative or opaque they may have been.
See: the classic memes about fresh army recruits buying expensive cars/truck at 25% APR. There are car dealerships outside of bases that make it their sole mission to separate fresh 18 year old recruits from their money.
they're already required to clearly display the total interest over the full loan term on the contract you sign. there's no hiding the fact that 25% APR with a 72 month term means paying ~100% of the principal again in interest. I honestly don't see how it could be made more clear that this is a terrible financial decision. it's like it just doesn't occur to people that they might have to pay for things other than a car note sometime in the next six years.
The world is a hostile place and everyone wants to drink your milkshake (including me).
Don't think there's anything that can or should be done about it. This is how it's always been and this how it will always be: it's fundamental to humanity.
Could that be because of lack of funding? I had friends in a private highschool and they were taught financial literacy, which isn't a big surprise. The rich getting richer.
> Of course I wouldn't get my 3% cash back for being a responsible user ...
My impression is that the cash back (& similar rewards) are mostly paid for by the merchants - who do not get (say) $100.00 when you pay them $100.00 with your credit card.
Exactly. The interest covers the cost of capital, delinquencies, administration, but it's the merchant fees that are paying the rewards.
Before Dodd-Frank and the regulation of debit card interchange fees, many debit cards were also offering lucrative rewards, despite there being no interest at all. With debit cards now limited to $0.20 + 0.05%, those debit rewards cards are gone.
Im not sure where this incredible fear of CCs comes from. It literally doesn’t matter what the APR is unless you’re irresponsible. Just pay the card off before it’s due. CCs are not complex beasts you don’t need a degree to understand them you barely need a high school diploma. The rules are simple:
- don’t pay for one, unless you can justify the perks
- don’t spend more money than you have. That’s a general rule of finances. I know people get into emergencies. Try to keep the overage as small as possible for as little time as possible. As soon as you have an overage your whole goal should be getting that debt cleared up as fast as possible.
- credit cards are only a tool to tell the financial world you are are responsible. So don’t use one if you can’t pay it back.
> Im not sure where this incredible fear of CCs comes from. It literally doesn’t matter what the APR is unless you’re irresponsible.
That's exactly where the fear comes from. Credit cards are really a test of financial self control, and a lot of people have really poor self control. Many people also don't seem to truly understand how interest works, they just see easy access to money in exchange for a monthly payment that they can afford.
Credit card companies have also intentionally targeted people with poor financial literacy. When I was high school and college (late 90s/early 2000s) it was really common for companies to set up booths on college campuses offering credit to kids who had little or no understanding of what they were signing up for and no source of income. I think regulations were eventually passed after some public outrage in response to news stories about college kids wracking up five figures of CC debt with no means to pay it off.
- don't eat more calories than you expend. That's a general rule of health. As soon as you have an overage your whole goal should be getting that cleared up as fast as possible
- calories are only a tool to fuel your body. so don't eat them if you don't need them.
Why not just debit cards? Pulls money directly from your account, you can only spend what you have, expenses are visible directly and works everywhere a credit card works. In many parts of the world, people basically use debit cards for everything, credit cards only for some cases.
What is so complicated to understand about credit cards? Do you really need to have a Nobel in economy to understand that you shouldn't charge for things you won't be able to pay at the end of the cycle?
I think plummeting savings (down to $600B from $4T as of October of last year) is probably the best indicator of a major incoming recession. The layoffs haven't really significantly impacted anybody outside of the tech sector and I think that's in part because consumers are still spending. However, they are spending their dwindling savings, not extra cash, and getting into credit card debt. This will eventually come to an end and then it will really hit the fan. I also don't see FED stop raising interest rates any time soon which puts even more pressure on economy. It's hard to see how any of this will result in a "soft landing."
Savings are not anywhere close to "dwindling". There are still huge excess savings accumulated during the pandemic. Relative to 2019 baseline ($1.4T annual), Americans accumulated about $2.2T in excess savings.
The 2022 shortfall relative to baseline is about $800B. Even if this continued it would take another 2 years to burn off excess pandemic savings. And that doesn't even count the sizable gains in home equity and investment portfolios over the period.
The layoffs in tech so far are a drop in the bucket. The pace of hiring overall surged unexpectedly in January (517,000 jobs added) - that's going to keep the Fed wanting to raise rates.
On the other hand, tech (and finance) layoffs probably impact the economy more because those being laid off are generally making higher salaries than most other industries. You've gotta wonder if tech layoffs are going to start hurting local economies in the Bay Area and perhaps Seattle.
That $4B number was a huge outlier, though. Here's the FRED graph (which should be a required link any time someone wants to talk about economics numbers): https://fred.stlouisfed.org/series/PSAVE
The combination of restricted consumer economies and extensive government assistance produced a savings boom the likes of which we have basically never seen in the US in the era of modern economic data.
And it's over, and so naturally consumers are spending down their bank accounts to the levels that they felt were appropriate before the pandemic. The point is that the current conditions are a much better approximation to "normal economy" than what was happening in 2020/21.
You can explain the inflation burp very well via the savings data. But trying to read a recession into it seems IMHO pretty ridiculous.
How does the savings numbers compare historically?
Honestly I've been hearing since 2008 about the next coming crash and it still hasn't come, despite massive shocks to the economy. Perhaps we're more robust than we think?
I get it - fear sells. But look at the recent job numbers? GDP grew last quarter? Inflation has slowed down.
I stayed with the same job since 2017 - too afraid to change jobs after the pandemic hit. No raises at all, and we're at a company that was able to profit from COVID-19. My wife and I have been taking huge credit card losses lately by staying with the company. I'm now interviewing and getting out. The inflation is killing everything. Definitely saw my grocery and gas bills double, easily. It's really hard to live in California right now, since every item at the grocery store got their with Diesel fuel (which is 5.00, peaked at 8 in the summer).
> I also don't see FED stop raising interest rates any time soon
The FED will do one or two more rate bumps for 0.25% in the next couple of months and then stop. At least that’s the collective belief of the bond market. Unless you know something that bond traders don’t.
This would be expected in a recession. First you use your credit cards to keep things going, eventually that runs out your now in twice as much debt at much worse interest rates, and soon that's gone. You start missing house payments, soon homes start getting foreclosed on, the boom we've built in construction starts to burst, and we have 2008 all over again, only this time we've already played the QE card. So it will be interesting to see.
My question for more financially savvy HNers, is I recently changed my investment portfolio to be more in money market and bond accounts since it seems cash will be safer as stocks would expect to go down, with the thought that once it bottoms out I can move back to stocks when they are low. Am I wrong on this reasoning or is the underlying logic sound?
> My question for more financially savvy HNers, is I recently changed my investment portfolio to be more in money market and bond accounts since it seems cash will be safer as stocks would expect to go down, with the thought that once it bottoms out I can move back to stocks when they are low. Am I wrong on this reasoning or is the underlying logic sound?
You are trying to time the market. That is notoriously difficult. You are almost for sure going to miss the ideal timing. That's why there's the saying, "time in the market beats timing the market". There's many write-ups on this topic, but https://www.schwab.com/learn/story/does-market-timing-work shows a decent breakdown of different strategies and how they would have worked out.
> You start missing house payments, soon homes start getting foreclosed on, the boom we've built in construction starts to burst, and we have 2008 all over again
I'm generally not sophisticated enough to time the market, but it seems like the largest player in the market is trying to crush it in order to save the dollar. Is it timing the market to recognize this fact and adjust one's portfolio accordingly?
In other words, I don't know what the stock market will do later today, next week, or for the next month, but it seems the general direction will be down until the fed pivots. Not straight down, there will be up days, weeks, months, but overall down. Don't fight the fed.
First agree with timing the market. But I am a bit skeptical about your overall point. Historically this has been true, but many people think we are at an inflection point and historical trends might no longer be true. This time is different is certainly often said and rarely correct, but ... this time is different, maybe?
Right because this time we're in a much larger asset bubble than we were back then.
At this point it wouldn't surprise me if we don't go into a recession because the larger the bubble gets the more desperately we need to keep some air in it. It would not surprise me to see cheap money return only because the alternative might, at some point, be the collapse of the entire systems.
We'll keep the bubble going so as long as we can, but the longer we punt this off the more extreme the breakdown is going to be.
This time it is much worse, and for stupid reasons.
The US government funded its huge balance sheet expansion mostly by short term obligations. When rates in long term debt were at historical lows… it chose a to go in on short term instruments (because interest rates never rise!)
As that short term debt becomes due and it needs to be rolled over, it will face a much higher interest rate, severely impacting the federal budget.
The last crisis was smoothed over because the fed stood in as buyer of last resort. It’s not clear it will be able to afford to do so this time.
Maybe, but they said they're going into bonds here which seems like a pretty safe move at this point (unless you expect substantially higher interest rates from here - I think that's unlikely, more likely rates will plateau after a couple more Fed increases and stay there for a while).
I can get close to 4.8% on 26 week t-bills right now, do you think I can get that kind of return in the stock market (index funds) over the next 6 months? Maybe, but I'd rather go with the safer bet on t-bills here. (Sure, there's a non-zero possibility that the clowns in Washington will do something stupid that leads to a [likely short-term] default, but if that were to happen stocks and pretty much everything else would tank as well)
I woke up this morning realizing I hadn’t seen any press talking about foreclosures in awhile so looked up the US stats. They are at incredibly low levels. Banks have clearly become very conservative about the loan products they are offering and seem to be sticking to very safe fixed rate mortgages.
I honestly don’t see a foreclosure spike happening any time soon. These things take a while to build and we are starting at the floor. Unemployment is at incredible lows. The economy is running hot, but no recession or housing bust seems to be in view.
The issue is generally that people are bad at timing the bottom, and often times it actually pays off to invest the same amount in dollars into the stock market, since you will buy as its going low and have more room for going back up.
There’s a very small chance you are going to time the bottom. The only way to time the bottom is to keep buying by dollar cost averaging. For most of us, that’s probably the wisest course vs. actively moving money around and trying to time the market.
I do dollar cost averaging and have since the early 90s when I first heard the term mentioned on a radio investment advice show (mutual funds, then). It has served me well. Recently, I started to do this into a couple index funds of my own creation using Fidelity’s Solo FidFolio and Stocks By the Slice (fractional share) features.
First, it’s not even clear that a recession will happen. And unless you are retiring and need the money in the next few years, it’s not wise to convert stocks into cash. You are trying to time the market which is pretty much impossible.
The people accumulating large credit debt have very little overlap with homeowners. The reason for this is very simple. The vast majority of homeowners purchased their house before 2021, and therefore are sitting on gigantic amounts of home equity. They have access to HELOC at much more favorable interest rates than credit card debt. (And no, we've seen barely any increase in HELOCs[1]).
In addition the average recent homebuyer has a FICO score of 768[2]. These are not the type of people who are running up credit card debt and living beyond their means. So while credit card delinquencies may go up, it's primarily concentrated among the poor, the young and renters whose budgets are squeezed by rising lease costs. In this group there are barely any homes to foreclose on.
> The people accumulating large credit debt have very little overlap with homeowners > HELOC
That sounds sensible, however I didn’t find any data to back up that assertion.
I did find “Higher-income people have more credit card debt, as do people who own their own homes.” which hints that you might be stating something incorrectly, or our definitions differ. Source text seems credible: https://www.moneycrashers.com/average-credit-card-debt-ameri...
Bonds are a good place to hang out in turbulent markets if your goal is to preserve what you have, but be careful with municipal and high-yield ("junk") bonds. These can and do go to zero sometimes. Bond etfs can sting unsuspecting investors, as their value can shift dramatically when rates change. Government treasuries are considered safest.
Optimistic view: inflation has risen by about 8 percentage points over the last two years, but average credit card interest rates have climbed only about 4 percentage points. So relative to inflation borrowing money got cheaper, leading to a rise in debt.
But the goods being bought with the credit cards went up 8%.
Consider before: Bob bought thing X for $100 before and then paid Y% interest on that debt. Now he buys it for $108 and pays (Y+4)% interest. It’s more expensive all around, even if his wages went up by the same 8%.
Stop trying to time the market. Virtually every piece of data available shows that on an individualized basis, you can't.
Put your money in index funds (or a Target Date fund for true hands-off investing) and go do something interesting and useful with your time instead of playing a losing game of trying to eke out more gains from a market teeming with sharks.
> First you use your credit cards to keep things going, eventually that runs out your now in twice as much debt at much worse interest rates, and soon that's gone.
Consumers have more financing options then ever, like when you buy a mac book over 18 months interest free versus paying straight up. Car loan preference has gotten longer: 5-6 years for example.
Its not necessarily good that more financing options leads to more debt, but its not apocalyptic either. This really depends on how they're measuring, and if they count balances that are being paid off in a timely manner or if these are minimum payments incurring interest.
I'd agree that moving into bonds for a while is a good idea here. I'm especially putting money into T-Bills as we're getting around 4.7% for a 26 week T-bill right now. The more bullish will say that we have bottomed out and the Fed is going to stop raising rates and start dropping soon, but given today's strong jobs report I don't see them dropping rates any time soon. And this credit card debt info (and auto loans defaults are up as well) makes me want to continue to be cautious about stocks.
What I have been doing is buying 1 month CD's. They are at great rates now and don't have the long time commitments other CDs have(you can get them via a brokerage like Morgan Stanley or Schwab). I have been seeing rates of 4.2-4.3%, the rest of my money is in high interest savings which is yielding in the high 3's. I think we will see a sharp correction and have alot of money on the sidelines once things start to fall apart.
Wealthfront is paying 4.05%, and if you can convince someone to open an account and use your referral, you get an extra 50 bps for 3 months, up to 4 times, for 12 months of 0.50% bonus.
You could get 4.55% for up to 12 months with 100% liquidity, much better than a CD.
Trying to time the bottom of the market is basically gambling. You might get lucky or you might miss out on huge gains while the market continues to run.
I’ve adopted a dollar cost averaging strategy and just direct deposit a set amount to be invested every month into diversified ETFs.
Since I can swing it, I’m also putting money into CDs since the rates are pretty decent, instead of keeping cash in my checking.
If you want safety and are buying bonds, make sure you actually understand bonds. For example U.S. long term treasury dropped by 30% in 2022, even more than the drop in S&P500; if you don't understand how the Fed raising the rate could affect your bonds portfolio, don't buy bonds.
As much as this makes a scary headline, credit card debt is almost exactly in line with wages. From January 2020 to today credit card debt grew 11%.[1] Over the same period nominal wages grew by 16%[2].
So if anything the current US consumers have a healthier ability to service their credit card debt than the already healthy numbers pre-pandemic. This is corroborated by the credit card delinquency rate which is still lower than any single year in pre-pandemic history[3]
Scare headlines like this are good for generating clicks, but ignore the basic reality. Most years credit card debt will hit a new record, because most years total GDP and consumer spending increases.
I'm curious how much of this is debt that is being carried for more than a month. I like many others use a credit card for the cash back / points and other benefits they provide and just pay off the balance every month.
My credit card debt looks substantially higher today than it did two years ago, but that's because I shifted from charging everything to my debit card to using a credit card that earns me rewards.
My average CC balance is about $1500-$2000, but it never stays there long enough to accrue interest because I just pay it off at the end of every month.
If it where the case that everyone was like you in their credit card use it would have to imply one month consumer spending also went up dramatically. This is something, at least according to earnings reports coming it, I don't believe we're seeing.
Or perhaps credit card popularity is increasing; spending that was previously done via cash and debit cards is shifting to credit cards. That would leave earnings constant.
I just recently started attacking my credit card debt, paying off cards. As I’ve paid off each balance two of the cards have immediately raised my limit to double or even 10x(!) my previous limit.
Which surprised me, the credit card companies think I’m making substantially less than I actually am.
I don’t really understand how it all works, as I feel like my total credit card debt is higher than I’d like, but my credit score got way better since now my balance looks way lower as a percentage of my total credit.
The first time I ever failed to pay off my card in full on a given month, they increased my credit limit significantly. That seemed a bit perverse to me: Hey, we see you're struggling, let us make sure you have enough rope to hang yourself with.
Prior to that I'd only ever increase my limit when my monthly spend would approach it, usually a holiday season.
Remember that payday loans are extremely profitable. Fucking with poor people and making them pay twice as much as everyone else is basically how most American businesses make their best profits.
I feel this might have been a coincidence, but at the end of the day every financial product is essentially a bet the banks make against you so they can get paid the interest.
Cash is worth more to me than what the credit card company thinks about me. What a bizarre take. Carrying balances is a positive thing if you pay on time every month.
As European who lived in the US for a while, I'm still baffled about the lax concept of paying off debt on (multiple) credit cards, vs. the strict monthly, limited and unavoidable debit from one's checking account.
It's all about cash flow. That has a huge value depending on your personal situation. But for a lot of poorer folks (and some wealthier ones with poor habits) it's just a way to temporarily spend more than you make. That's not a good use for credit cards, of course.
The superior protection of your assets from fraud is icing on the cake.
It varies by person, but if you are moderately responsible and have a budget or at least a good handle on your monthly income you would be stupid to not, say, buy things using Apple Card (just an example) with Apple Pay for 2% daily cash back. In addition, if someone swipes your debit card and steals the money from your account you are screwed. If someone swipes your credit card you just get a new card and nothing bad happens to you. You also have protections from bad sellers/merchants through chargeback mechanisms.
You just use the credit card as the debit card and you are good to go. Certainly not everyone can handle that and there's probably a society-wide problem here but that doesn't detract from the individual decision to be made in the operating environment.
Using debit-only can backfire on you, I did this for years and when I went to buy a house, banks were like, you have no credit. I was confused because I had various utility bills and they showed up on my credit report, and I had a score from those. But for house loans they ignore those, and only look at credit cards and actual loans, which I had none of. So I had to get a credit card and put off buying a house for a year until I could build the credit they were looking for.
Turns out it was pointless since I was self-employed they wouldn't give me a mortgage anyway (wish they had mentioned that up front, but they didn't). Ended up buying a small house with savings, which really hurt my future wealth, but oh well.
Headline is spun. Current rate data is hugely confounded by the pandemic. In fact consumer debt dropped like a rock during the pandemic and is bouncing back to something that looks decidedly normal to me (higher than the 2011-2012 recovery, much lower than the 2002 dot com aftermath, etc...).
Please look at FRED charts when discussing this, I had to pull out one for personal saving in another comment in this topic too: https://fred.stlouisfed.org/series/CDSP
Also, piles of middle class people took those stimmie checks and applied them directly to outstanding credit cards. Now people's habits are just coming back.
Readit News
These cards are accepted by society because they benefit those who know how to use them, but it's hard to look past the fact that so many people, if not most, are financially illiterate (because of failings of education due to lack of funding) and so many people screw themselves financially for decades if not their whole lives because of them.
Part of me wonders what the world would look like if we massively regulated credit card terms, like no more than 5% APR. Of course I wouldn't get my 3% cash back for being a responsible user of my card, but we also wouldn't be screwing people so hard on the other end. We can say "but they signed the terms!" all we want, but we all know that people agree to things that are a detriment to them and the world for short-term gain. Regulation should be there to prevent that as much as possible.
What would happen is there would be no credit cards for anyone. Nobody is going to lend money to the general public at 5% for unsecured debt.
IIRC, they used to be capped at 18% many years ago, still high, but much more reasonable then some of the rates that are out there now; so not opposed to a cap, but it can't be so low that it kills the business altogether.
If anything, we should limit seller transaction fees, as I believe the EU does.
What is the rate of (sorry, I don't know the correct term) how often current credit card companies get "shafted"?
aka somebody runs up a $10,000 balance or whatever and then doesn't pay it
Credit cards are a single product that serve a lot of different use cases simultaneously, and credit card issuers are able to profit off of most of those through different mechanisms. Not everyone carries a balance on credit cards, including some of the most lucrative market segments[0].
Furthermore, BNPL is an example of lending money to the general public at 5% (or less, in many cases) for unsecured debt. In that case they make their money back on fees for late payments.
[0] If you'd like an overview of how credit cards make money, this post from patio11 covers the basics: https://www.bitsaboutmoney.com/archive/how-credit-cards-make...
Smaller credit limits + lower interest rates makes it much harder for people to become unable to pay.
Today it’s 4.9% after the rate increases
Set it at 5% above a given base rate (fed rate, Bank of England rate, etc) and what’s the problem?
I went through the U.S. education system in 8 different states in schools in poorer areas, and even then, the education was sufficient to understand the concept of not spending money you do not have.
Set the thing to auto pay the balance every month, and do not spend more than you earn. I expect that much from the 95% of the population that has had the opportunity to learn how to read and write.
My public schooling in a podunk county TN had no component for financial management.
Even so, you assume that such education exists in a vacuum. It does not. It runs counter to a deluge of culture and advertising that tries to induce people to go into debt the moment they are able to pass a credit check.
As an example, I have a friend who is really struggling with credit card debt, but they are in no way financially illiterate. They have an accounting degree and work in finance.
It is extremely sad to watch them suffer because they know exactly what's going on, but they can't control their spending habits. I think this is a more common situation than the alternative.
Some don't need much, others will always or almost always spend more than they have, but traditional financial advice will be the same for both groups.
It is a deeply emotional response from most people, they know what they are doing is stupid. They almost never need me to tell them.
I think there are other reasons for the failed education. Even with more money, I doubt they would prioritize it. Most schools offer personal finance as an elective. It should probably be part of the core curriculum. Even then, you will have students that are unintered or don't apply themselves.
The easy fix is to reign in the lending by setting low limits that only increase with good payment history and cap lifetime interest payments as an percentage of the original purchase, like 200% adjusted for inflation.
Want a credit card? Here's one with a $250 limit. Didn't pay it back? Now you'll owe $500 adjusted for inflation, and you can't get another card or more credit unless this one is paid back.
The political/legal ability to do this is more questionable.
Is people paying more than 200% lifetime interest on credit card purchases a normal thing?
Day to day, the only use of my credit card is just buying stuff online - so when my # gets stolen, my money isn't taken out of my bank account (like it would be if I used a debit).
I know people some people with thousands of dollars in credit card debt.
Currently I make about $50 a month in credit card rewards and after using them for 30 years I have never paid a penny in credit card interest. I looked at the credit card interest rate and it just seems ridiculous so I just don't buy things I can't pay off at the end of the month.
I know that most of the financial institutions purposely advertise and try to deceive people into going into debt so they can make more money from them.
I know that people run into difficult times but I see so many people buying things they don't really need with a credit card.
We do, definitely. However wouldn't that also produce the same result as regulating the cards?
Ie i imagine cards are profitable for the responsible folk because they so heavily abuse the irresponsible and/or uneducated folk. If we were to educate everyone then the cards wouldn't exploit "anyone" and suddenly the card makers have no incentive to offer the profitable cash back/etc.
Now of course, we can't educate "everyone". And i'm not a fan of systems that build themselves on the back of the exploited.
Do i have the wrong framing here?
No, they're accepted because the only way we can figure out how to continue economic growth is through a massive credit system. This means doubling down on a strategy of infinite growth as that is the only way such a system is sustainable.
Cheap money coupled with expanding credit is the foundation of the global economy for the last decade. You could also argue pretty easily that cheap money is just another view of expanding credit.
If we increased the cost of money and reduced the amount of consumer credit available the global economy would collapse. Ever since the GFC we've pushed off collapse only by expanding global debt.
I've always hated this "caveat emptor" mentality. It just assumes the seller can't be blamed out the gate, no matter how manipulative or opaque they may have been.
See: the classic memes about fresh army recruits buying expensive cars/truck at 25% APR. There are car dealerships outside of bases that make it their sole mission to separate fresh 18 year old recruits from their money.
Don't think there's anything that can or should be done about it. This is how it's always been and this how it will always be: it's fundamental to humanity.
My impression is that the cash back (& similar rewards) are mostly paid for by the merchants - who do not get (say) $100.00 when you pay them $100.00 with your credit card.
Before Dodd-Frank and the regulation of debit card interchange fees, many debit cards were also offering lucrative rewards, despite there being no interest at all. With debit cards now limited to $0.20 + 0.05%, those debit rewards cards are gone.
- don’t pay for one, unless you can justify the perks
- don’t spend more money than you have. That’s a general rule of finances. I know people get into emergencies. Try to keep the overage as small as possible for as little time as possible. As soon as you have an overage your whole goal should be getting that debt cleared up as fast as possible.
- credit cards are only a tool to tell the financial world you are are responsible. So don’t use one if you can’t pay it back.
That's exactly where the fear comes from. Credit cards are really a test of financial self control, and a lot of people have really poor self control. Many people also don't seem to truly understand how interest works, they just see easy access to money in exchange for a monthly payment that they can afford.
Credit card companies have also intentionally targeted people with poor financial literacy. When I was high school and college (late 90s/early 2000s) it was really common for companies to set up booths on college campuses offering credit to kids who had little or no understanding of what they were signing up for and no source of income. I think regulations were eventually passed after some public outrage in response to news stories about college kids wracking up five figures of CC debt with no means to pay it off.
The rules are simple:
- don't eat unless you're hungry
- don't eat more calories than you expend. That's a general rule of health. As soon as you have an overage your whole goal should be getting that cleared up as fast as possible
- calories are only a tool to fuel your body. so don't eat them if you don't need them.
Dead Comment
The 2022 shortfall relative to baseline is about $800B. Even if this continued it would take another 2 years to burn off excess pandemic savings. And that doesn't even count the sizable gains in home equity and investment portfolios over the period.
On the other hand, tech (and finance) layoffs probably impact the economy more because those being laid off are generally making higher salaries than most other industries. You've gotta wonder if tech layoffs are going to start hurting local economies in the Bay Area and perhaps Seattle.
The combination of restricted consumer economies and extensive government assistance produced a savings boom the likes of which we have basically never seen in the US in the era of modern economic data.
And it's over, and so naturally consumers are spending down their bank accounts to the levels that they felt were appropriate before the pandemic. The point is that the current conditions are a much better approximation to "normal economy" than what was happening in 2020/21.
You can explain the inflation burp very well via the savings data. But trying to read a recession into it seems IMHO pretty ridiculous.
Honestly I've been hearing since 2008 about the next coming crash and it still hasn't come, despite massive shocks to the economy. Perhaps we're more robust than we think?
I get it - fear sells. But look at the recent job numbers? GDP grew last quarter? Inflation has slowed down.
The FED will do one or two more rate bumps for 0.25% in the next couple of months and then stop. At least that’s the collective belief of the bond market. Unless you know something that bond traders don’t.
Deleted Comment
My question for more financially savvy HNers, is I recently changed my investment portfolio to be more in money market and bond accounts since it seems cash will be safer as stocks would expect to go down, with the thought that once it bottoms out I can move back to stocks when they are low. Am I wrong on this reasoning or is the underlying logic sound?
You are trying to time the market. That is notoriously difficult. You are almost for sure going to miss the ideal timing. That's why there's the saying, "time in the market beats timing the market". There's many write-ups on this topic, but https://www.schwab.com/learn/story/does-market-timing-work shows a decent breakdown of different strategies and how they would have worked out.
> You start missing house payments, soon homes start getting foreclosed on, the boom we've built in construction starts to burst, and we have 2008 all over again
A few things here:
1. We have less building now than during the lead up to 08: https://tradingeconomics.com/united-states/housing-starts
2. Subprime mortgages are dramatically lower in volume
3. ARM loans are dramatically lower in volume
Just because there might be an increase in defaults doesn't mean we're going to see anything like 08.
In other words, I don't know what the stock market will do later today, next week, or for the next month, but it seems the general direction will be down until the fed pivots. Not straight down, there will be up days, weeks, months, but overall down. Don't fight the fed.
Right because this time we're in a much larger asset bubble than we were back then.
At this point it wouldn't surprise me if we don't go into a recession because the larger the bubble gets the more desperately we need to keep some air in it. It would not surprise me to see cheap money return only because the alternative might, at some point, be the collapse of the entire systems.
We'll keep the bubble going so as long as we can, but the longer we punt this off the more extreme the breakdown is going to be.
The US government funded its huge balance sheet expansion mostly by short term obligations. When rates in long term debt were at historical lows… it chose a to go in on short term instruments (because interest rates never rise!)
As that short term debt becomes due and it needs to be rolled over, it will face a much higher interest rate, severely impacting the federal budget.
The last crisis was smoothed over because the fed stood in as buyer of last resort. It’s not clear it will be able to afford to do so this time.
Maybe, but they said they're going into bonds here which seems like a pretty safe move at this point (unless you expect substantially higher interest rates from here - I think that's unlikely, more likely rates will plateau after a couple more Fed increases and stay there for a while).
I can get close to 4.8% on 26 week t-bills right now, do you think I can get that kind of return in the stock market (index funds) over the next 6 months? Maybe, but I'd rather go with the safer bet on t-bills here. (Sure, there's a non-zero possibility that the clowns in Washington will do something stupid that leads to a [likely short-term] default, but if that were to happen stocks and pretty much everything else would tank as well)
I honestly don’t see a foreclosure spike happening any time soon. These things take a while to build and we are starting at the floor. Unemployment is at incredible lows. The economy is running hot, but no recession or housing bust seems to be in view.
Maybe later. Likely eventually.
In addition the average recent homebuyer has a FICO score of 768[2]. These are not the type of people who are running up credit card debt and living beyond their means. So while credit card delinquencies may go up, it's primarily concentrated among the poor, the young and renters whose budgets are squeezed by rising lease costs. In this group there are barely any homes to foreclose on.
[1]https://fred.stlouisfed.org/series/RHEACBW027SBOG
[2]https://www.bankrate.com/real-estate/average-credit-score-to...
That sounds sensible, however I didn’t find any data to back up that assertion.
I did find “Higher-income people have more credit card debt, as do people who own their own homes.” which hints that you might be stating something incorrectly, or our definitions differ. Source text seems credible: https://www.moneycrashers.com/average-credit-card-debt-ameri...
This view is likely overly optimistic.
Consider before: Bob bought thing X for $100 before and then paid Y% interest on that debt. Now he buys it for $108 and pays (Y+4)% interest. It’s more expensive all around, even if his wages went up by the same 8%.
Put your money in index funds (or a Target Date fund for true hands-off investing) and go do something interesting and useful with your time instead of playing a losing game of trying to eke out more gains from a market teeming with sharks.
Consumers have more financing options then ever, like when you buy a mac book over 18 months interest free versus paying straight up. Car loan preference has gotten longer: 5-6 years for example.
Its not necessarily good that more financing options leads to more debt, but its not apocalyptic either. This really depends on how they're measuring, and if they count balances that are being paid off in a timely manner or if these are minimum payments incurring interest.
You could get 4.55% for up to 12 months with 100% liquidity, much better than a CD.
I’ve adopted a dollar cost averaging strategy and just direct deposit a set amount to be invested every month into diversified ETFs.
Since I can swing it, I’m also putting money into CDs since the rates are pretty decent, instead of keeping cash in my checking.
[0] https://investor.vanguard.com/investment-products/mutual-fun...
I may be misunderstanding, but are you saying we're currently in a recession?
So if anything the current US consumers have a healthier ability to service their credit card debt than the already healthy numbers pre-pandemic. This is corroborated by the credit card delinquency rate which is still lower than any single year in pre-pandemic history[3]
Scare headlines like this are good for generating clicks, but ignore the basic reality. Most years credit card debt will hit a new record, because most years total GDP and consumer spending increases.
[1]https://fred.stlouisfed.org/series/CCLACBW027SBOG [2]https://fred.stlouisfed.org/series/CES0500000003 [3]https://fred.stlouisfed.org/series/DRCCLACBS
My average CC balance is about $1500-$2000, but it never stays there long enough to accrue interest because I just pay it off at the end of every month.
Which surprised me, the credit card companies think I’m making substantially less than I actually am.
I don’t really understand how it all works, as I feel like my total credit card debt is higher than I’d like, but my credit score got way better since now my balance looks way lower as a percentage of my total credit.
Prior to that I'd only ever increase my limit when my monthly spend would approach it, usually a holiday season.
The superior protection of your assets from fraud is icing on the cake.
You just use the credit card as the debit card and you are good to go. Certainly not everyone can handle that and there's probably a society-wide problem here but that doesn't detract from the individual decision to be made in the operating environment.
Turns out it was pointless since I was self-employed they wouldn't give me a mortgage anyway (wish they had mentioned that up front, but they didn't). Ended up buying a small house with savings, which really hurt my future wealth, but oh well.
Please look at FRED charts when discussing this, I had to pull out one for personal saving in another comment in this topic too: https://fred.stlouisfed.org/series/CDSP