Is a Credit Card Apocalypse Coming?

Happy holidays: credit card APRs are at all-time highs, and Americans are carrying unprecedented amounts of credit card debt.

After Cyber Monday, it's time to whip out your credit cards and start buying, right? The fact is that according to a NerdWallet survey that was released on November 25, 2019, 48 million Americans are still paying off their credit card debt from last year's holiday season. That's up from the 39.4 million who were paying off 2017 debt last year.

Credit card rates are at all-time highs

According to the website creditcards.com, as of November 20, 2019, the average credit card annual percentage rate (APR) was 17.21%. According to the Federal Reserve website that goes as far back as 1994, the average credit card APR reached an all-time high in Q2 of 2019.

Average credit card interest rates 2009 - 2019
Average credit card interest rates 2009 - 2019, Source: Federal Reserve/Marcia Wendorf

This reflects the latest rate change made by the Federal Reserve on October 30, 2019, when they lowered their rate by a quarter of a percentage point.

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Since July 2019, the Fed has lowered rates by .75 of a percentage point, however, in remarks made on November 13, 2019, Fed Chairman Jerome Powell said that the Fed may not cut rates again for some time.

American Express, Discover, U.S. Bank, Citi, Barclaycard, and Wells Fargo have all lowered the annual percentage rate on their new card offers by the same quarter of a percentage point, but some credit card issuers are increasing rates for applicants with lower credit scores.

Barclaycard increased the maximum APR on its Visa card by a quarter of a percentage point, and Capital One recently raised its rates for consumers having average credit, while leaving the rate alone for customers having excellent credit.

The fact is that when compared to credit card APRs from three years ago, in November 2016, the average card APR is up by over 2 percentage points.

Economist Andrew Keinsley at Utah's Weber State University notes that "credit card debt can get away from you really easily," but Keinsley sees credit card debt as "not as large a threat as the mortgage crisis in 2007 because it is a different kind of debt. It's not collateralized, meaning that you won't lose your house if you default, and it can be unloaded in bankruptcy court. There are many release valves."

Keinsley also noted that the Federal Reserve does stress tests on the large financial institutions that include the scenario of a number of people defaulting on their credit card debt.

Is a credit card apocalypse coming?

According to the New York Fed, in Q1 of 2019, the number of people unable to make a credit card payment hit the highest level in seven years. Millennials between the ages of 18 and 29 had the highest levels of default.

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According to the website creditcards.com, in Q1 of 2019, the average credit card debt per borrower has risen to $5,554.

The 2008 financial crisis was precipitated by people defaulting on their home mortgages. If the high-interest rates on credit cards overwhelm people’s ability to pay their credit card bills, will they also default and create a credit card apocalypse?

It's also interesting to note that there has been a decline in the savings rate and gasoline prices are rising. Historically, those two have been indicators of past recessions.

You can avoid going further into debt this holiday season by:

  • Considering what your emotional goals are for the holidays
  • Confining gift giving to children only
  • Making a shopping list and sticking to it
  • Researching brands and prices online, including price histories, before going to the store; that way you'll know if something is truly 25% off
  • Avoiding impulse purchases by leaving the store and reflecting on whether you really need or want an item.

Why do we spend during the holidays?

A recent USA Today story quoted Los Angeles-based financial therapist Amanda Clayman as saying that during the holidays, "we’re chasing a sort of emotional experience."

What sort of emotional experience? Just think about any of the Hallmark movies that run during this time of year. Oh wait, actress Lori Loughlin has starred in many of these Hallmark movies, but not this year.

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This year, Ms. Loughlin is accused along with her husband, Mossimo Giannulli, with bribing officials at the University of Southern California to get both their daughters admitted to the school.

The same USA Today article quotes behavioral economist for investment publication Morningstar, Sarah Newcomb, as saying, "This is a sad and lonely time for many people." And, for many people, shopping is a coping mechanism.

Look at any of the TV commercials already running in the U.S., according to Newcomb, they "show the life you want to be living." How do you get that life shown in the commercials? By surprising your spouse with a Lexus automobile having a big red bow on top, that's how.

Is a Credit Card Apocalypse Coming?
Car with a bow on top, Source: Aqıa Color/iStock

We want what we see on television

For me, it was the mid-1950s TV show Father Knows Best, starring Robert Young, Jane Wyatt, Elinor Donahue, Billy Gray, and Lauren Chapin. The series ran on various channels from October, 1954 to May, 1960.

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Is a Credit Card Apocalypse Coming?
"Father Knows Best", Source: ABC Television/Wikimedia Commons

The show was about a family headed by Jim Anderson, who was the manager of an insurance company in a fictional Midwestern town. His wife, Margaret, was a housewife, and their three children were Betty "Princess", James "Bud", and Kathy "Kitten". During every episode, the children went through the growing pains of well-loved, middle-class children of the 1950s.

Oh, how I wanted to be one of the Anderson children, but the reality of the show was quite different from what appeared on the screen. Lauren Chapin, who played Kathy, as a young child had been the victim of sexual abuse. Married at 16 and divorced at 18, she became a drug addict, attempted suicide, and was sent to a psychiatric hospital.

After that, she sold drugs, forged checks, and was in and out of jail. According to her Wikipedia page, today Chapin is a licensed and ordained evangelist.

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On his IMDB page, Billy Gray is quoted in 1983 as saying of his Father Knows Best years: "I wish there was some way I could tell kids not to believe it - the dialogue, the situations, the characters - they were all totally false. ... Father Knows Best purported to be a reasonable facsimile of life. And the bad thing is that the model is so deceitful. ... If I could say anything to make up for all the years I lent myself to that kind of bulls*it, it would be: "YOU Know Best".

As for father Jim Anderson, in reality, Robert Young suffered from both depression and alcoholism, and he attempted suicide in January 1991.

Young worked to pass the 708 Illinois Tax Referendum, which created a property tax that supported mental health programs in his home state. The Robert Young Community Mental Health Center in Moline, Illinois is named after the actor. Only Elinor Donahue and Jane Wyatt led relatively normal lives.

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