Credit is an essential part of modern life. The real estate market is utterly dependent upon mortgages that allow people to buy their homes and pay for them over a long period, generally in excess of twenty years. Real estate over the medium to long term has always been a good investment. While homeowners will be paying interest on their realistic loans for the term of the mortgage the increase in value of the property in the vast majority of cases more than compensates.
Various Kinds of Debt
Recent figures suggest that average mortgage debt across homeowners in the USA stands at over $150,000. Student debt is also a significant figure just above an average of $30,000, but the worrying statistic is the level of credit card debt in the country. The average family owes over $7,000 on cards; many households owe much more. Credit card companies earn their money by charging a significant interest rate on outstanding balances. Those people who pay off their purchases at the end of each month use cards for convenience. Those that merely pay off the minimum payment required each month are the valuable customers as long as they do not default.
Across the country, credit card debt approaches $900 billion. That is a remarkable figure given the harsh lessons that the recession should have taught society. That said, the figure is fairly constant each month. The US Economy does need consumer spending to help with its growth and indirectly that should boost jobs and higher incomes. However, there is a real danger that credit card spending is supporting the shortfall of income coming into the home. Families are failing to pay their regular monthly bills from that income.
Half and Half
The estimate is that half of the households in the USA are carrying forward credit card debt that incurs penal interest. It follows that the other half realizes the convenience of using a credit card for their purchases and then pay off the balance in full by the end of the month.
There are some signs that the level of indebtedness is falling, but that may also be a sign that some debt has had to be written off by the credit card companies as people have simply defaulted. As the recession hit, credit card debt was rising. The environment was fairly relaxed as real estate values were rising, and regular growth engendered a feeling of complacency within consumers. The problem came with the crash. Credit card debts continued to rise for a while, and that can certainly be attributed to the fact that cards were as a remaining source of money for those that had lost their jobs.
The first round of writing off uncollectable debt began shortly afterward. Overall indebtedness dropped, but it was not as a result of consumers across the board paying their debts. This write off began a period when credit card companies became far more circumspect about issuing new cards with credit limits without more stringent credit checks of the applicants. Every credit card company had spent the early years of the Century aggressively seeking more customers with headline special offers strongly marketed nationwide.
There are signs that the companies have begun to relax once more with the number of credit cards in circulation as high as it has ever been. The question is whether everyone has learned the lesson of the recession. It seems they have not or at least in desperation the piece of plastic is still the way to finance their lifestyles.
Fairly recently, some of the card companies have reintroduced the concept of rebates on spending. It was a tactic that was tried and discarded a few years ago. They are hoping to attract new clients with the incentive of rewarding their customers for using their cards. The sums are difficult to fathom because the card companies need profit. It is a difficult accountancy exercise to predict consumer spending while offering a percentage rebate. The companies need to calculate their merchant income, and that is not guaranteed to cover the rebates.
Like many offers from such companies, the problem arises if they are not sustainable or if new users do not understand that there is a time limit on an introductory offer. Time will tell whether this reward system will remain available.
Business travelers will find such offers very appealing, and credit card companies welcome their business. Companies that provide cards to their executives are very welcome clients for the large credit card companies. They find credit cards convenient as do many consumers. Where the problem lies is with those people who are tempted to buy something they cannot afford. They want it but rarely realize with the interest they will pay on the outstanding balance in the coming months they have not got a bargain at all. Credit cards are great in the right hands; in the wrong hands they can be a recipe for financial disaster.
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