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The Real Reason We All Have Credit Card Debt

If you live in America you probably have some personal experience with debt…but why?

It's a TRAP!

The average American household has $5,700 of credit card debt, and the long-term trend shows that credit card balances are increasing…but why?

Below is a list of the four biggest reasons we all have credit card debt.

#1: The cost of living has gone up…and the average wage has stagnated

Since 1964 the average American wage has gone up, but the cost of living has gone up as well and purchasing power has stagnated, leaving most Americans behind.  Over the past 40+years the average household income has risen, but their expenses have increased – the real costs of homes, health insurance, child care, and vehicles has outpaced inflation, and many people use debt to help fill that gap.

The median home price rose by $60,000 from 1960 to 2000 (even after adjusting for inflation) and home prices are still rising faster than wages in most of the United States, making home ownership increasingly difficult for average Americans. Paying rent may be more affordable, but it doesn’t allow for the buildup of equity in a home and eliminates the ability to access that equity in the event of an unexpected expense. Instead, credit cards are usually relied on for unexpected expenses.

#2: Easy access to debt credit

You used to have to physically go into a bank or lending institution and apply for line of credit, providing pay stubs, proof of residence, and even personal references to prove you were a “worthy” borrower.  Now all you have to do put a new pair of jeans in your virtual shopping cart, and before you checkout, the store is asking if you want to save 20% by applying for their store credit card. It’s easy to open a credit card account, and even easier to use one once you have the card in your hand. 

Credit card companies are in the business of lending money – but they make the most money when you can’t afford to pay them back…at least not right away. The ease of opening new accounts combined with easy online and in-person credit use provides an opportunity for over-spending.

#3: How we view debt has changed

Credit card companies and banks have spent billions of dollars telling us that we deserve to have what we want right away. Just about every retailer takes credit, you can buy everything from a stick of gum to a Hawaiian vacation on a credit.

But that has not always been the case, historically debt was used for purchases that were an investment in durable goods that promoted future income growth. For example a farmer might use debt to purchase a tractor that would help him harvest more of his crops and grow his income.

Now many people use credit to spend their next paycheck in advance on all kinds of items that don’t add any long-term benefit to their lives (I’m looking at you, Target).  This habit of spending the next paycheck ahead of time can lead to a cycle of revolving (not paid off monthly) debt, effecting savings, and very often, falling behind.

The truth is that no one bats an eye when you whip out your Discover card to pay for McDonalds - cash just slows you down anyway!  But that was not always the case, we are a lot more cavalier about our use of debt than we used to be.  

#4: Our “needs” have completely changed

The truth is, even after accounting for all the items listed above – for many of us, it’s still our own fault. Discretionary spending (aka spending on non-essential items) is a big chunk of most people’s spending. Even if you’re not someone who buys big ticket items, all that little stuff adds up.

With the rise of the use of Facebook and other social media, keeping up with the Jones's has reached an epic level. I’m not going into the whole “Everyone with debt buys too many $7 Starbucks coffees” nonsense that is always thrown around, but the hard truth is that a lot of us buy stuff we want, but don’t necessarily need (even those of us with no savings).

Expensive items like brand new cellphones and the latest clothing trend suck many people in, and buying with debt is easy and it feels good to have something new. And there are just so many cool new things to buy.  Do I really NEED an Apple watch? Almost no one does, but that didn’t stop me from buying one…

Everyone’s experience is different, but the majority of people with credit card debt have it because of one of the reasons above (or a combination of them). The first step to getting out of credit card debt it to recognize what caused you to get the debt in the first place – so ask yourself, why do YOU have credit card debt?



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