Here’s a statistic.
In 2020 alone, the total credit card debt acquired amongst borrowers in the United States stands at roughly $807 billion, almost twice as much as the total GDP of Singapore ($324 billion), UAE ($383 billion), Hong Kong ($341 billion), and Norway ($399 billion).
Debt is a topic that is ubiquitously familiar to the world but poorly understood (and even poorly managed). Students who are unable to support their education with a trust fund or scholarship must rely on external plans with additional interest rates. Such rates are enforced by the federal government and thus can’t be negotiable. However, with regards to credit card debt, compounded interest is a silent killer than dramatically cripples a borrower’s ability to pay back in the long term; especially in periods of high inflation where central banks may choose to raise interests rates to limit borrowings and money supplied.
Therefore, the principal advice to avoid credit card debt preached by all is to simply pay on time. If it were that easy, however, there wouldn’t be a scenario where the credit debt accumulated in 2020 would consequently exceed the total US military spending to the war in Afghanistan – the longest running conflict in US history – at $778 billion.
The philosophy of credit debt is more nuanced than simply forgetting to pay a loan. A sudden emergency such as a hospitalisation or corporate downsizing hinders a borrower’s ability to pay on time. However, it’s argued that an emergency reserve of at least 6 months to 1 year is equally important, if not more. Apart from sudden emergencies, there are persistent patterns to a borrower’s spending behaviour that contribute most to falling in a debt trap.
One of such is a lack of financial literacy. Despite credit cards making up 68% of total debt acquired, only 30% of average US citizen maintained a financial plan tho tracks income and expenses. Several studies have shown that people earning within the income brackets of $75,000+ are more likely to keep a budget plan than those earning less. Those who are wealthy prioritise maximising income and minimising expenses. Those who are broke continue to spend more as income rises, to a point where they break even. Therefore, financial responsibility is accurately reflected by one’s awareness of their spendings, and with digital apps such as YNAB, the process becomes easier.
The second reason why the credit card debt trap is so prevalent is because of the ‘credit card’ themselves. The US in particular fosters a subculture of “maxing out”, in which consumers make regular payments through credit cards until it reaches its limit. Credit cards are typically associated with luxury and convenience in pop culture, and borrowers are still susceptible to make small but highly frequent payments with their cards, such as a snack or groceries. This ties to the philosophy of “Keeping Up With The Joneses”, in which social hierarchal values are determined by materialistic, tangible items such as houses or cars. This pressure to keep up to peers propagates yet another “flex culture”: to show off brands and labels at the cost of sinking lower to a debt trap. Much of these innate desires of luxury and social status are exploited by marketing advertisements which in turn create an ecosystem of overspending and defaults.
All of this can be avoided if more people study the fundamental concept economics revolves around: opportunity cost. A hundred dollars can get you a necessity or a luxury, but it cannot get both. Many citizens around the world attempting to mimic latest fashion trends fail to account for the other best alternatives their money could have been spent in. Those who prioritise towards minimising their expenses can pay their instalments in time and spend appropriately for the rest of the month, while those who prioritise towards spending find themselves burdened by compounding interest. This four letter word alone, much like love, has the power to make or break your life as a whole.