Back in August, credit card debt made headlines in most U.S. media outlets. This is because U.S. consumer credit card debt reached and surpassed a staggering $1 trillion, a record high that raises significant concerns about financial stability and potential economic consequences.
According to the latest numbers, nearly 60% of U.S. consumers have incurred credit card debt. The average credit card debt per borrower is $6,194 and about 60% of Americans who incurred credit card debt live paycheck to paycheck. This begs one only question that could be asked in different ways: How did we get there? How did most American households end up incurring over $1 trillion in credit card debt? How do most people end up living paycheck to paycheck?
The American economic system is a debt-based system. It essentially relies on consumer spending to spur growth. And to encourage consumer spending, the U.S. government, commercial banks, credit card and Buy-Now-Pay-Later (BNPL) companies have been engaging in aggressive marketing and risky lending practices. The chief objective of these marketing and risky lending practices was to encourage consumers to borrow rather than using their actual money to spend. This, in turn, encourages consumers to incur debt by purchasing goods and services they can’t afford in reality.
The use of credit cards gives consumers the illusion that they purchase whatever they want without any real consequences, which has encouraged many consumers to live above their means. And this has, in turn, led people to live paycheck to paycheck. This is why we see households living paycheck to paycheck despite making over $100,000 a year.
The minimum payments that credit card companies allow cardholders to make to pay off the balance give them the illusion that these payments are not consequential and can be taken care of later. This then incentivizes them to leave their credit card balance unpaid while the interest payments on that balance accumulate.
The problem is that most of the cardholders who are in debt are so because each missed payment is reported to credit bureaus, causing their credit score to drop significantly, thus preventing them from qualifying for important loans such as mortgages or car loans.
As they leave their previous balance unpaid, most cardholders pile up purchase after purchase delaying their balance payment, which leads them to max out their credit card limit. And once they reach their credit card limit, they are now either forced to pay off the balance or default.
If they default on their credit card balance by filing for bankruptcy, this means that they forfeited their ability to get a loan. In some escalated cases, wage garnishment may occur, where a court order may allow the collection agency to garnish a portion of their wage to repay the debt; or creditors would simply sue the cardholders to recover the outstanding debt, which weakens even further cardholders financial conditions.
It is clear that a credit card debt crisis is looming over U.S. consumers. To remedy the current financial conundrum and prevent the crisis from happening, some economists have suggested that the government should implement policies to raise wages. This is nonsense, however. Raising wages is pointless if government continues to print money to stimulate the economy. Wages will never catch up with prices because of inflation. We live in a system that is inherently inflationary. So, this solution is doomed from the start. And government cannot increase wages anyway because wages are determined by agreement between an employer and an employee. And no matter how high the gross wage of a person may be, only government gets to tax it. So the difference between gross and net wage is substantial. The higher the wage, the more it is taxed. So, it does not make sense to ask government to raise wages.
The real solution to this problem is financial education. At the end of the day, financial problems are endogenous, not exogenous. If people become financially educated, they can make better and more informed decisions about their spending to avoid falling into a debt trap that they may never get out of.