The credit card for most of the 1990s and the first decade of the new millennium was the most often tapped source of credit for the middle class. 76.2% of U.S. households used credit cards. (Source: Federal Reserve Bulletin February 2006) When a family needs immediate access to resources that are not available from their current income, they look to credit cards. However, personal credit has proven to be one of the key destroyers of wealth for average wage earners. The average household in the United States carries an average credit card debt of $10,000 or more. (Source: Nilson report April 2009) While there is the instant gratification of borrowing against future income, the bill will always come due. If a family does not have a structured plan for repayment and clear understanding of how their personal credit works, the chances for entering a financial difficulty increases.
The Crisis of Personal Credit and the Middle Class
The problems surrounding the current use of credit have manifold sources. The first is the general lack of financial education offered to the general population. If you don’t know how money and credit works, you can’t use them properly. The other problem is the confusing language of credit cards. While many households get offers in the mail concerning low interest rates, they are left ignorant of the complete set of fees included for various actions. This makes it hard for many consumers to make informed choices concerning the credit card that would be the best personal fit for their finances.
Credit Card Reform
Congress recently passed the Credit Card Act of 2009 as the government started to understand the role that these problems with credit have in causing the recent recession. Not only were there the lessons of firms such as AIG and Lehman brothers; there was also the concern raised by some analysts that defaults by credit card holders could fuel a financial relapse into recession. The reform bill does some important things to make credit fairer and simpler to use.
- It placed a ceiling on certain rates and fees
- It requires that language concerning the features, rates and fees of a card be written in plain English
- Created a Consumer Protection Agency to give consumers a federal conduit to forward their complaints to concerning violations of the Credit Card Reform bill.
- Prevented Minors from having access to credit cards by raising the age limit
The Individual Importance of Financial Responsibility
The solution for families wanting to get out from under credit card debt doesn’t stop with the passage of a government bill. It also requires better self-education about personal finance. For example, one needs to learn how to properly leverage personal debt against family assets. It also means knowing the real meaning of what a financial asset or liability is. For example, one of the biggest misconceptions for the average consumer was that their home was an asset. However, an asset adds to your resources; it doesn’t drive you into financial bankruptcy. Most homes are bought on credit rather than cash, so they end up being a drain on families’ incomes. So knowing the makeup of your personal finances is an important first step.
Saving more than you spend is another important thing that middle class households are starting to learn. This is important because these reserves can help pay down debt and improve purchasing power in a more concrete way than credit. Many experts suggest that a family save around 20% of their income.
The inherent problems concerning personal credit become possible to overcome by taking into account the new strides made by legislation and combining it with the hopeful emergence of a financially educated public.