April 2001

 

Am I Trying to Shock You?
Jamie H. Thompson, thompsonja@missouri.edu

In 1970, Americans had $5 billion in credit card debt. By 1995, total credit card debt had risen to $395 billion—an increase of 2,000%. Just two years later in 1997, credit card debt had increased to an estimated $455 billion.

• The average balance on a credit card is $7,000. The average interest rate is 18.9%.
• Late fees are now $29.00.
• The average household has 10 credit cards.
• Credit card companies solicit the average American 7 times a year through the mail.
• If your credit card balance is $8,000, and you make the minimum monthly payment at 18% interest, it will take you 25 years, 7 months to pay the debt off. You will pay $15,432 in interest charges, bringing your total to $23,432.
• Americans paid out approximately $65 billion in interest last year alone.
• If you didn’t have your credit card payment of $218 a month, and you instead invested that money in a 12% savings plan, in 25 years you could retire with $1,354,930 in the bank.

Shocking statistics! Here is one more. If you were to borrow $3,000 for a car at 12%, it would take 54 hours of work at a $6.50 wage rate to pay just the interest on the loan. We can rationalize the 54 hours of work because we have a car to show for it. Let’s say the $3,000 is credit card

debt and our interest rate is 18.9%. At a $6.50 wage rate, it would take 86 hours of work to pay the interest. Do you remember what you purchased using your credit card? Is the 86 hours of work worth it?

Am I trying to shock you…yes! Has credit card debt gotten out-of-hand…yes!

The term “credit” applies anytime you receive goods or services before making payment. We use credit to acquire debt. Credit applies to more than credit cards—it includes home mortgages, car loans, student loans, utilities, telephone, to name a few. In this article we are focusing on credit card debt.

Credit cards generally fall into one of three types:

• Single-use credit cards can be either a revolving account or a 30-day account.
• Travel and entertainment credit cards were originally for people who traveled. There is an annual membership fee for this type of credit card. Because the balance is paid in full, there is no finance charge—30-day account.
• The most common card is the bank credit card offering the convenience of a 30-day account and the revolving account. They also offer cash advances.

Revolving accounts can be paid in full or a monthly minimum payment may be made (anywhere from 1.5 to 10% of the balance). A maximum balance per customer is established and new purchases may be made as long as the balance remains below the maximum. A finance charge is usually calculated on the unpaid balance.

Thirty-day accounts are due in-full usually 15 to 30 days from the date of billing. If paid within the time allowed, there is no finance charge.

Do you remember your first credit card? What type was it?

A short history lesson. The credit token was developed in the late 1800's because stores wanted a faster way to complete transactions rather than have to lookup individual information or record the name and address of the buyer every time. To complete a transaction the clerk only had to record the identification number from the back of the token on the sales slip.

Until the arrival of the revolving bank card, all other card bills were required to be paid in full upon receipt.

In 1930, Beacon Oil Company sent a letter to its new credit card holders, stating that the customer would receive monthly statements for their convenience charges and should hand the credit card to the attendant who would place it in a small machine which would imprint the name and address on the charge slip. The letter asked the recipient to sign the card on the back as protection against fraudulent use.

The accepted inventor of the bank credit card was John Biggins at the Flatbush National Bank of Brooklyn in New York. In 1946, Mr. Biggins developed the "Charge-It" program in which local merchants who accepted the card would deposit sales slips into the bank and the bank billed the customer.

In 1951, Franklin National Bank released the first revolving charge card. The revolving line of credit was an attraction for early customers. Using the revolving card a customer could borrow money, repay it, borrow again, repay some, borrow again, and all without having to be approved for each new line of credit as long as the borrower remained under their credit limit.

Credit cards have been around for longer than people imagine.

Sources: American Debt Management Services, Inc. www.beevy.com; Myvesta.org 2000; Money Action Plan, University of Missouri Extensionprogram