The Eighth Wonder of the World

The holiday season is now behind us and as the news has been coming in ex-post, all signs point to this season having been a boom for retailers (expectations put the total at a high of $680.4B this year – even JC Penny had something to be happy about). But this piece is not about the current state of retail. It’s about the gift that comes after the holidays, the gift that literally keeps on giving (compounding in fact). That four letter word, debt. Specifically revolving debt. Consumers are expected to have spent $906 on average this year for Christmas gifts, a figure that’s been steadily rising since the lows of 2008 (when the average spend was $616). Many have paid for these gifts on credit.

So it begs the question, how are we in the U.S. doing when it comes to debt? Well that depends on what side of the debt you’re on. If you’re holding it, maybe not so good, the worst ever in fact. U.S. consumers owe a total of $905 billion on their credit cards, according to recent analysis by personal finance website NerdWallet. This translates to $7,136 per household, a 2.8% increase over a year ago. But more startling is the story when you take into account not all households have credit card debt. If you only consider households that have credit card debt, the average jumps to a much more alarming figure, $15,624.02 to be exact. The one silver lining in this number, is that it’s less than the average among this group a year ago, it’s actually the lowest the figure has been in the past five years.

That glimmer of hope should not overshadow the fact that the overall average credit card debt increased by a substantial amount in 2017, and has done so for each of the past four years. Simply put, a greater percentage of households are carrying debt. Those who know me, know that I’m not some raving debt hawk. Debt has its place, leverage is a beautiful thing, so long as you respect it. But It would appear that consumers are wading into some treacherous waters based on the data.

Now the data. According to the latest Quarterly Report on Household Debt and Credit released by the New York Fed’s Center for Microeconomic Data, total household debt increased by $116 billion to reach just shy of $13 trillion in the third quarter of 2017. Percentage wise, household debt increased at a 3.7% percent annual rate after 3.8% in the second quarter. Overall delinquency rates ticked up slightly to 4.9% of outstanding balances. 65% of delinquent debt is considered severely delinquent, with an outstanding balance at least 90 days past due. Severe delinquencies ticked up in the third quarter for credit cards.

There’s an infinite number of “why’s” to explain this trend. Perhaps it’s likely due to a combination of factors:  the much-improved U.S. economy, record low unemployment levels, soaring consumer confidence, and the number assets at peak levels (stock market, housing, cryptocurrency, etc). These spikes in net worth change the psyche of consumers, increasing the purchasing power of those Americans who own stocks, homes, and digital currency. This purchasing power is the underpinning for household spending, the biggest part of the economy. But there’s a difference between realized and unrealized gains. Americans are looking to their unrealized gains and increasing their spending with realized debt. This is the perfect cocktail for consumer debt expansion, which is exactly what we’ve seen.

Add to these factors, the easiness of credit banks and financial institutions have supplied since ’07/’08 and the increased competition among those institutions, consumers have been bombarded by those enticing 0% intro APR offers and attractive sign-up bonuses, that are helping to persuade Americans to obtain and use ever more credit cards.

The bottom line is that if you’re one of those individuals with high-interest credit card debt, especially if you have a five-figure tab like the average balance-carrying household mentioned above, it’s vitally important to use this new year to take a cold hard look at your situation and correct course. Compound interest is the eighth wonder of the world if you’re investing, but can be a death sentence if you’re the borrower. The best idea is a plan that stops the high interest rates and fees cold turkey (ok enough with post-holiday dad puns).

You need to check out Tally. I recently sat down with Jason Brown, Founder and CEO to talk about what they’re doing with AI and credit card debt. His vision for the future can’t get here soon enough. But what really hit me was his candor and the “why” of starting Tally with his co-founder, Jasper Platz. It’s a very intimate and raw look into a founder’s story. Simply put, if you have credit card debt, (and you likely do), Tally is a simple, intuitive app that makes it easy to save money, manage your cards, and pay down balances faster.  Seriously, check them out at  meettally.com – your future self will thank you.