How A New Debt-Bomb Is About To Explode
The other day, I took my car in for its annual inspection. I thought the car was in pretty good shape, but I didn’t count on these bumpy, windy roads up here in the hills of Pennsylvania.
I was floored when my mechanic explained that the car’s suspension would need extensive repair. He said the bill would cost several thousand dollars, an expense I hadn’t planned.
He said not to worry. We have an interest-free credit card with zero interest or fees for a year. I would have twelve months to pay off the repair costs.
Done.
I gladly took his offer and have until October 2025 to pay for my car’s new suspension.
I’m sure I can pay off the credit card, which is an excellent deal.
However, reading the attached statements and disclosures, I realized I needed to stick to my payoff schedule. The contract stated that if I still had a remaining balance at the end of the year, my interest charge would skyrocket to 35.99%, the highest I’ve ever seen.
That interest charge is so great that you may never pay it off unless you have a minimal balance. You would, in short, become a debt slave to the credit card.
It was then that I realized that I wasn’t alone. Many Americans have signed on to a similar card when they make a new purchase, transfer an existing balance, or open many “initial low rate” cards. As I write this article, I’ve just received an offer for a “Holiday Card,” which has the same structure: an initial low rate with a killer rate to follow in a year.
All of us are facing a “Credit Bomb,” and while the specific date it will hit may vary, mine, as I said, hits next October. The bomb will hit unless we pay off the card or other loan.
Here’s the bad news: the Credit Bomb is already going off. The interest rate on an average Credit Card has gone from 14.5% in February 2022 to 21.5% today. That’s a 50% increase in interest expense in just over two and a half years. Making matters worse, we are much more reliant on our Credit Cards than we were 2 ½ years ago. Today, our credit card debt is one-third higher than in 2022: higher debt, higher interest rates, a deadly combination.
Consider what that means for the overall economy.
We are a county that relies on Credit Card debt to make many of our purchases of goods and services. After all, the Credit Card my mechanic offered me allowed me to go ahead and purchase his repair service. However, the interest on those credit cards helps only the banks; to me, it’s just an expense. And as a consumer, the more interest expense I have, the fewer goods and services I can purchase.
So, let’s look at what we’re all paying for Credit Card Interest. In February 2022, collectively, we consumers spent $117 billion in credit card interest. That’s a lot of money, but I’m sure most of us felt it was a manageable expense. Today, our interest expense has doubled to $213 Billion, a level that’s becoming unbearable.
This doubling of interest rate expense occurs even though many of us are still in the grace period BEFORE our interest rate is hiked. Remember, my interest rate is zero until October next year.
How do I know that interest rates are becoming unbearable? Because the number of people who are delinquent in their payments has doubled in those same 2 ½ years (from 1.5% to over 3%). People are tapped out and simply cannot make their payments.
Of course, we consumers aren’t the only part of the economy seeing our interest expense explode; the Federal Government is in the same boat. You may have noted that the Federal Government’s interest expense surpassed $1 Trillion per year, an amount higher than the Defense Budget and behind only Social Security Expenses and Medicare. And, if there’s one thing you can count on, interest expense will become the country’s number one expense within a few short years.
Interest expense is becoming a burden across every aspect of the economy, reducing economic growth, inhibiting consumer spending, and burdening our children and grandchildren.
Economists have already begun lowering future economic projections because of the coming debt burden. This thinking was undoubtedly behind the Federal Reserve’s recent action to lower interest rates. Regrettably, the Fed is notoriously slow in easing rates, and its current waffling over what to do next indicates this lack of conviction.
In the meantime, those of us with Credit Card Debt need to make sure that we pay it off BEFORE those oppressive higher rates kick in. Our financial survival will depend upon our ability to manage our debt expenses.
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