Although credit card debt is a relatively new phenomenon, it is the spiritual descendant of consumer debt, which has been around with us forever. Consider the words of the bestselling Napoleon Hill in his book, The Law of Success, which was originally published in 1928 as part of an eight-part series:
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It is a terrible thing even to think of going through life like a prisoner in chains, bound down and owned by somebody else on account of debts. The accumulation of debts is a habit. It starts in a small way and grows to enormous proportions slowly, step by step, until finally it takes charge of one’s very soul.
Thousands of young men start their married lives with unnecessary debts hanging over their heads and never manage to get out from under the load. After the novelty of marriage begins to wear off (as it usually does) the married couple begins to feel the embarrassment of want, and this feeling grows until it leads, often-times, to open dissatisfaction with one another, and eventually to the divorce court. … No sacrifice is too great to avoid the misery of debt! … work [your] way out of slavery. – Napoleon Hill
It is interesting that nearly a century later, human nature is still such that Hill’s words ring true. Credit card debt overwhelms people to the point that some even commit suicide over it. But despite all of the high-profile cases of credit card debt disasters, the reality is far more interesting. The truth is, despite the well-documented statistic that the average American family carries $8,000 in credit card debt, Money Central’s Liz Pullian wisely points out that:
- Most Americans actually owe no credit card debt
- Those households that do have credit card debt often carry a balance of $2,000 or less
- Only 1 in 20 households carries the infamous $8,000 in credit card debt or more
How Could the Media Be So Misinformed on Credit Card Debt?
The reason this misinformation exists is because people stupidly take the total outstanding credit card debt in the United States and divide it by the total number of households. But someone like Bill Gates could owe $100 million in an American Express card and the interest he earns on his bond holdings in a single month would wipe out the balance so it is idiotic to attribute that to regular household credit card debt. Furthermore, the statistics didn’t include all households, just those with credit cards! That means that it divided the total debt among a much smaller base than was appropriate.
Pullian’s best point was this:
Consider what would happen if you and 17 of your friends and family were in a room with Bill Gates and Warren Buffett. The average net worth of a person in that room would be north of $4 billion. The fact that everybody else’s personal net worth was just $100,000, or $1 million, or even $10 million, wouldn’t affect the average that much because the big boys are sooooo much wealthier than you.
The bottom line: It’s all nonsense. The average American households does not have $8,000 in credit card debt. Don’t believe it for a moment. Pullian pointed out the following:
- 23.8% of American households have no credit cards at all — no bank cards, no retail cards, nothing.
- Another 31.2% of the households the Fed surveyed paid off their most recent credit card bills in full.
- So together, the households that owed nothing on credit cards equaled 55% of the total.
The particular article is older than I would like but I hope to go pull the Federal Reserve data for myself. I know that household credit card balances have been crashing for years thanks to the recession – I’ve written about it at About.com several times.
Most American households don’t have a credit card debt problem either because they refuse to get a credit card at all or they pay off their balance each month.
But try telling someone who is drowning in credit card debt that most American family’s don’t have the same problem and they will start to attack you because it is in their own self-interest to avoid the cognitive dissonance that information would cause. But that should be good news. If most Americans don’t struggle with credit card debt, it means that you don’t have to, either.
Personally, I’ve eschewed everything except the American Express Plum Card program, which gives my businesses a 3% cash discount for paying the balance in full 10 days after the statement closes. I also use American Express cards personally to get the points. I just despise credit card debt. Carrying a balance is anathema to me. It would drive me nuts.
Years ago, Suze Orman said something brilliant: The very first month you cannot pay off your credit card balance in full, you have a debt problem. It is already out of control. If you live by that mantra, you will never get in trouble save black-swan events like a health crisis. It remains the best credit card advice I’ve ever heard.
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Reader Comments (4)
Comments are presented chronologically, with replies indented beneath the comments to which they respond.
janechin
November 6, 2010
This is interesting... from what is in popular media one easily gets the impression that most Americans are drowning in credit card debt. I'm surprised that the reported data suggests the debt load isn't as severe was portrayed. However you can also say that the data is based on the survey and at the mercy of responses given, and there may be a self selection bias (i.e. people who may not have debt or a big debt burden may be more likely to respond to the survey).
Joshua Kennon
November 6, 2010
Replying to janechin
Part of it, I think, comes down to the fact that success is boring to the media. Showing someone getting evicted from their home results in viewers or readers. Showing that 1 out of 3 people who own a home are living below their means, clipping coupons, and spend less than they earn doesn't make for exciting television.
You also have to realize there is an incentive bias at work. When the economy fell off a cliff and a lot of people were losing their homes after missing their mortgage payments, they were a loud voice in the political arena. The people with no mortgages weren't. The reason? They had no incentive to be. They were sitting at home, watching the storm go by, unaffected by it. If anything, human nature makes people more cautious when they have something and others don't. When everyone at the office is complaining about their bills or credit card debt, look to those who shut their mouth and don't say a word. The odds are good, they are the ones with money in the bank, no mortgage, and no credit card balances. No one wants to be "that guy" or "that girl" who brags about having no money problems when others are falling further and further behind.
Also, those with no credit card debt or mortgages often don't want people to know they are well-off because then they are expected to help others with their bills. One older lady I know has no debt, money in the bank, a big annual income, and owns a bunch of rental homes. She feigns "old lady poverty" because she doesn't want her friends or children, who can't manage their money, asking her for a handout all the time. She doesn't want to be expected to pick up dinner for everyone or buy the movie tickets.
Another report you might find interesting: If you really want to have fun, look at the "Flow of Funds" report from the Federal Reserve. It tracks all of the money that moves through the United States economy so you can see how much cash came out of checking accounts and into mutual funds or real estate, etc. It is awesome - and very, very huge but because you can download it in Adobe PDF format, you can search easily.
Jane
November 6, 2010
You're absolutely right: bad news sells news. A sound bite of, "in today's news, Americans are saving as they should be, retirement is on track, 99% of people live within their means and hold no debt!" doesn't rile people up as much as hearing about people losing their homes, babies food being snatched out of their mouths (or milk out of their bottles).
You also brought up a new point, about why people are hesitant to share or disclose their wealth, and would rather feign being less "well off" than they really are. Good food for thought. If people say "no" then they are viewed as stingy even when they worked hard to earn that wealth. I do find it sad that she has to conceal her wealth from her own children, though.
Do you think people who are indeed "well off" are being smart to pretend they aren't so well off?
Joshua Kennon
November 6, 2010
Replying to Jane
I think it depends on the situation. If you are running an investment partnership on Park Avenue, you are going to want to advertise your wealth because it lends credibility to your business and makes it easier for you to raise more assets to manage.
On the other hand, let's say you started saving $10,000 a year when you were 15 years old by working after school. You invest that same amount at 10% each year until you are 50. You'd have nearly $2,700,000 sitting in your retirement and brokerage accounts, probably generating something like $120,000 a year in dividends and interest without working.
If you were a school teacher, in the middle of a normal town, living in a normal house, with normal friends, I think it would be better to hide the money. Human nature being what it is, things will change if people found out, even if they are small things. Your coworkers may decide not to pitch in for a birthday present because "she doesn't need it". Your church may suddenly start showing up and asking you to cover the cost of the furnace that needs repair.
If you don't want to stand out, these things would be a disaster. Instead, it would be better to keep the money hidden, give anonymously through a law firm that distributed checks for you, and go about your life like normal.
That doesn't mean you couldn't live well if you were in the minority of millionaires who preferred nice things. You could have secretly gone to France for Christmas vacation and had all of your shirts made by Charvet. Honestly, how many people really know they are considered one of the top shirt makers in the world, with every detail and fabric crafted specifically for your body and preferences? Are they going to notice a Montblanc pen? A Steinway & Sons piano? Only someone who is well-versed in upscale goods or has money themselves is going to be aware of those clues.
You could travel the world, give generously, and live well without your neighbors or coworkers knowing the extent of your portfolio or bank balances. That means you get to enjoy a regular life, but still have the benefits of wealth.
So, in the end, I think it depends upon personality, life goals, and the situation. If you live in an exclusive gated community where everyone else has money, too, and you can discuss preferred stock opportunities with your neighbors, there might not be any need to hide it. If you live in a farm town where most people make $35,000 per year, you probably want to fly below the radar.