Why Credit Cards Matter So Much

Sharon December 2nd, 2008

Yesterday put the nail in the coffin of a move from recession (small “r”) to Depression (capital “D).  Two pieces of news that were absolutely essential came out – and no, neither one was that we’ve been in a recession since last year, or that last week’s stock market rally was yet another sucker rally.  The first was the observation that McDonalds is now the second-largest merchant vendor on credit cards – that is,  people are now buying their Big Macs on plastic – in part because they don’t have the cash.  Credit card balances have risen enormously in the last few weeks, as people attempt to keep going through the holidays:

Commercial bank exposure via the total amount of credit card loans outstanding has risen more in the last 10 weeks than it did in the previous 10 months cobined. Moreover, the growth in the last 10 weeks — $32.3 billion, or roughly $600 million per shopping day — represents nominal growth of 9.3%, or 48.3% annualized over the last 10 weeks. According to American Express, delinquencies on credit payments rose to 4.1% of all credit outstanding in the third quarter, up from 2.5% in 2007, with Bank of America’s rate rising even more steeply – to 5.9% for the period. Moreover, the pool of loans deemed uncollectable rose to a high 6.7% in the third quarter, soaring from 3.6% last September. What consumer spending there is has been fueled in part by credit card: The second-largest merchant-vendor for credit card use is now McDonalds. This suggests that many consumers are in serious distress if they need to get their $4 Big Mac and fries with a credit card. 

 The second is the news that credit card companies are planning to pull 2 trillion dollars of personal and small business credit lines over the coming months, to reduce their risk:

The credit card is the second key source of consumer liquidity, the first being jobs, the Oppenheimer & Co analyst noted.

“In other words, we expect available consumer liquidity in the form of credit-card lines to decline by 45 percent.”

Almost all of the consumer spending we’ve done in the last few days has been done on credit.  In November and December, retailers see more than 40% of their annual sales – and since the average American comes out of the holiday season with more than $800 in credit card debt, it is safe to say that retailers in general are dependent on an annual payback that is then amortized over mos tof the year in the form of personal credit.  That is, the consumer spending economy, 70% of our total economic activity, is utterly dependent on consumer credit.  And whether that’s a good thing or not, the destruction of consumer credit lines will bring about a shift in consumer spending that makes the present economic woes looks petty.

But there’s more to it than that – Americans have seen real wages decline, and have depended heavily on credit, and as unemployment rises and companies cut benefits, pensions and retirement savings disappear, they will depend on their credit more, not less.  The credit card allows them to even out uneven income streams – and millions of Americans have them.  Either they rely on uneven overtime, on tips, on seasonal boom and bust cycles, or as small business owners and contractors whose payment comes in irregularly. 

When unemployment strikes, right or wrong, the expenses go on the credit card.  When hours are cut back or paycuts proposed, the credit card covers the inevitable emergency car repairs or medical bills.  Yes, people should have saved.  Yes, running up credit card debt you aren’t certain you will be able to pay off is dangerous.  But it is also the case that saving has been enormously discouraged, and reliance on credit has become a cultural norm, even a cultural pressure.  Cards poured out like water.  Couples who arrived with a downpayment at a mortgage meeting were told to keep their cash and take out a 100% loan.  Companies made huge sums of money by persuading ordinary people to put their money in the markets and that growth could never end.  Yes, there is personal responsibility here, but the situation was not of each person’s personal making, and there is plenty of blame to go around.

In difficult times, the American policy is to rely on credit as a reserve source, as a substitute for savings.  And that reserve is about to be pulled out from under them.  And for the best reasons – the ability to pay is declining rapidly. Most Americans have no idea how they would pay off their debt in this economy – and my bet is that most of them won’t.  Past recessions have been survived by increasing debt and sitting tight until things got better.  Now, we can’t increase debt, and we can’t sit tight, and it will be a long time before things get better – much longer than most people forsee.  You only have to look at the bank’s own reasoning here – they are withdrawing their credit lines because they don’t believe that a boom will come along and allow people to pay off before they are forced to default.  They know that reducing credit on this scale will hurt them too – but their own internal analyses have convinced them that they are in more danger by loaning than they are by not loaning.  Given the huge role of consumer credit in the economy, that’s one big shift.

What is certain is that without credit, the recession will hit a lot harder, a lot faster than it has.  Personal spending will drop a whole lot more.  People who were getting at least Big Macs will stop having them to eat.  Moreover, with reduced credit lines, people will be forced rapidly to assess their situation – the transition between unemployment and foreclosure, between a bad year and homelessness, between getting by and going hungry, between surviving a medical crisis and being bankrupted by it –  will be much, much shorter.

Yes, building up credit card debt has been bad for us.  But it has also functioned to delay our reckoning, to keep marginal participants in the economy going, to keep the economy going even as far as it has been.  And without large open credit lines, life as we know it will shift.  Suddenly, small businesses won’t be able to buy inventory on credit – and many of those businesses will close.  Travellers whose balances are near their new, dramatically lowered limit will not travel, because they can’t reserve a car, a hotel room or a plane ticket.  People will stop shopping online.  And the kids whose daily meal, tragically enough, was the Big Mac (and we should remember that one out of every three Americans eats daily in a fast food restaurant) won’t eat. 


135 Responses to “Why Credit Cards Matter So Much”

  1. jayam says:

    Crooked Private Central Banks + Brainwashing TV Set + Living Beyond Means = Disaster!

  2. Anonymous says:

    Those who pay off the credit card balance in full each month are still living on credit. That balance paid in January is for a life lived in December. If the monetary inflows stop suddenly, then breaking even means you don’t live (eat, heat, clothe) in February. It is surprising how many are lulled into a sense of superiority by this act. It is cult behavior. The shopping cult. Tell me you pay 2 months ahead on your charge account. Tell me you are also 100% debt free ( no mortgage, no car loan.) I won’t be impressed. Why should I be? That ought to be normal behavior.

  3. h margret says:

    I’m one of those completely exposed people. I bought a property the year of 9/11 for my small gallery business. then the gas system failed, the bathroom failed & my income dropped by over 50%. I’ve been using up all my assets since then. my credit cards are now 3 months unpaid, and my mortgage is next. did I say I work 3 jobs? one pays $10/hour…and I have a college BA and strong work ethic. it’s as they said, credit was an illusion for pay. and then Wall Street & real estate investment got all the money, which is now gone.

    when citigroup calls, I congratulate them on their free bailout. but there’s none for me, and they acquired an asset with $20 billion of our money. something wrong here…..but they only have money when we pay. I say let the credit card companies re-invent their own future….after all, they need us more than we need them. we need each other more than those corporations.

  4. Jared says:

    Sites like this provide much needed encouragement, information and support to people. But please consider that if our precarious economic situation turns for the worst, access to the internet may become impaired. Please ensure that you interact with and develop a sound support group with those in your community so you can maintain your closeness with like-minded individuals should the internet ever go down.

    Re: credit cards -

    I was at my sister’s at Thanksgiving and all the kids were playing Monopoly. I walked over to take a look and was literally frozen by what I saw – it is not only cashless now (they use a bank card) but it is nothing but sports fields, Disneyland and Hollywood. OMG !!!! When I was a kid, Monopoly taught me the value of money. A couple $1 didn’t seem like much but you would learn that a few $1 made a $5, and a couple of $5 made a $10, etc. I learned the value of a dollar pretty quick. These kids were just laughing and frantically feeding their plastic card into a machine without even checking their balance. This next generation is going to be damned to debt hell !!! Moreover, as a kid I played the game acquiring wealth by investing in sound enterprises like railroads, energy and water utilities and rental properties. These kids only have sports, Mickey Mouse and celebrities to stare at. When I pointed out what I saw to the parents there they just shrugged and said “Oh, it’s just a game.” That’s the sickest game I’ve ever witnessed – that’s nothing but predatory and manipulative. Corporate influence over our kids has gone too far, America. We as citizens need to monitor or children’s activities better and teach them that debt is not wealth or we will do nothing but hand them over to a life of financial slavery.

    I have never owned a TV in my life and obviously have not played a board game in many decades, but has not anyone else noticed this ??? I still can’t get over it.

  5. LRH says:

    To: In Need of Advice and others in trouble: a bankruptcy filing will still allow you to keep your house and a car and will put a foreclosure on hold – legally called a “stay” – even though the Bush bankruptcy bill written by the credit card industry took away the possibility of a full discharge of all debt from anyone who still has any significant income. Even when new businesses are incorporated or started as an LLC, banks usually make the owner guarantee the loans personally, so it is unlikely that would have made any difference to a new start-up. You shouldn’t just stop paying, because the credit card co. will not hesitate to obtain a judgment and then enforce the judgment lien against any property you own. If you are married and own your home as a tenancy by the entireties, the credit card co will not be able to touch it if your husband did not sign off on the credit for you business. The longer you can delay any action by the credit card co. is found time. Don’t hesitate to see a lawyer with expertise in bankruptcy and taxes.

  6. Jennifer says:

    I really appreciated the article
    and all of the comments and help
    that people offered each other.
    My husband is very ill and we have huge debt.
    Health care may be free, in Canada,
    but not if you have chronic illness
    and want to get well. Then you pay.
    If you want to start getting well so you have
    the energy and ability to think,
    to get through these times,
    read a few books by Gabriel Cousens, M.D.:
    “There is a Cure for Diabetes:
    The 21+ Day Program” and
    “Green Rainbow Live-Food Cuisine”.
    If we all have to go through this,
    we might as well attempt to bring ourselves,
    and whatever part of the planet we can affect,
    more into balance.
    Here’s a free website of writings
    and photographs that my husband and I host:
    And if anyone wants to talk further,
    I can be reached at [email protected]
    Thank you for all your insights!

  7. In need of advice says:

    Thanks everyone. I’m meeting with an attorney on Wednesday.

  8. Sharon says:

    In need – I agree, you need to talk to a lawyer. If you call legal services, they should be able to help you find a referral. And for you and Carol and Jennifer – you are in my prayers. I had a period in graduate school where things were pretty dire financially, and I remember so acutely how afraid I was. I hope that you can find a good way out – make sure you understand the law, and do what you need to.

    I have been a bit distracted and not following this thread, but let me be clear to some of my less kind readers – make your points civilly and without unnecessary meanness, or they will be deleted.


  9. Kim says:

    I have been paying off my credit cards every payday. I have about five left. Over the last two months I have received letters from credit cards companies either canceling my unused cards, or lowering my credit balances on my remaining cards to their present balances or $100, whichever is lower. I have not been late on any of my payments.

    If I have any type of emergency I will just be out of luck.

    I think the middle class is intentionally being taken down and destroyed by taking away any form of liquidity.

    The New Word Order is making its move big time. It will be the haves and have nots, a technocratic feudalism. I guess we have to destroy the useless eating elite before they destroy us, and there’s a lot more of us than them.

  10. Big Hearts Come Later says:

    We needed the opposite of the bailouts, and credit in the last decade – we needed savers.

    Saving was/is punished. Credit holders were rewarded.

    In reality the interest rate should be at 15% or more. To encourage saving interest has to be at least at the level of real inflation, which was around 13-18%, but might be less now that the cost of gasoline is hitting the floor.

    Was this caused by the NWO? You bet it was. It everyday schmoes like myself were able to ascertain in 2003 a housing bubble and the inability for debitors to pay, why weren’t the papers reporting this? Why wasn’t the government?

    Credit and Usury are some of the worst peacetime sins visited on mankind, and not a single person responsible will serve even a day of jail time.

  11. TheTruth says:

    You people are making me sick. Im reading, oh i pay off my credit card every month and oh i have a years worth of money saved away. Well guess what Morons. What do you think is going to happen when the crash/depression really hits? 1st off, you have been good sheep BUT its not you to be worried about it’s the 50% plus people who have no money saved and are maxed out on the cards. when the full blown crash hits. half the people in the USA are going to run out of money and then what do you think will happen? they for sure are not going to sit out in the cold with no food or home. They are going to riot, Thats right they are going to freak out and come to your house, They will be so hungry that they will do anything to get your food. Yes millions are going to turn into criminals over night. they will have no money no credit,no home and no job and they will have no choice but to come to you for your food that you saved for them. to steal your money you saved and maybe even shoot you and live in your house for awhile until their caught. It is not going to be pretty. when the final collapse comes in 2009 it is going to be the biggest disaster the world has ever seen and it will last for years. The entire system is going to come down and only the strong and ruthless will survive i promise! In the end there will be no credit cards and America will have to start from scratch!

  12. [...] A big batch of gloomage du jour from Cheryl: First Time In 50 Years Stocks Yielding More Than Bonds — Fortress Suspends Redemptions in Biggest Fund (JWR warned us about hedge fund redemption suspensions, back in October of ’07) — Consumers Unexpectedly Cut Back on Credit in October — Bush Finally Admits Recession, Says All Three Major Automakers May Not Survive — Employers Cut 533,000 Jobs, Most in 34 Years "The unemployment rate would have moved even higher if not for the exodus of 422,000 people from the work force. Economists said many of those people probably abandoned their job searches out of sheer frustration. In November 2007, the jobless rate was at 4.7 percent." Also remember that those who have used up their unemployment benefits are not counted in this statistic either, thus, there are a lot more people out of work than this number indicates — Gulf Oil CEO Says Gas May Drop to $1 Per Gallon — China Slowdown Could Drop Oil to $25/Barrel — US Banks to Cut 30,000 More Jobs — 50 Ways to Beat Deflation (Sung to the tune of the Paul Simon song) — The Great Depression II: Are We Being Played? — Swiss See Platinum as Safe-Haven Investment — Why Credit Cards Matter So Much [...]

  13. Joe in JT says:

    How Easy it is to get thousands of dollars into debt!!

    1. My beloved dog (Australian Shepard) developed lymphoma and I had to bring him to the Vets. This cost me $1000. They kept doing repeat blood test to drain me of my money. Visa or Mastercard they asked?

    2. I finally HAD to go to a dentist because I had an absessed tooth. The dentist repaired the tooth and then figured he didn’t make enough money so he drilled out the tooth next to it, refilled it and it broke into peices the next day eating a sandwhich. He purposely weakend the tooth knowing full well I would be back shortly in dire pain. He then charged me another $2000 on top of the original $1000, Three grand total on the credit card.

    3. Car repairs… tires, engine repair ect.

  14. Holly says:

    I skipped ahead, so don’t know if anyone mentioned this:
    Is it too late to build less house, leave a planned addition for later, or leave part of the house unfinished and do the work yourselves as you have time/ funds? I know it’s more complicated when you deal with a bank- you can’t get your certificate of occupancy 2 yrs after you move in like I did. Anything to have less mortgage and not pay people to do work you Can figure out…
    Can you pay any contractors on the side to do extra work, terracing or making swales for your garden, putting in extra ventilation in a basement room for an eventual root cellar, or anything else where a little foresight now would make you more self sufficient down the road. Does your bank require any landscaping? Make it all edible and plant as soon as feasible. I think less debt and more food growing is a matter of survival.

  15. major says:

    I agree that responsibility spreads all around…unfortunately our “beloved” President has made sure that his high roller friends (the primary perpetrators) are being bailed out…before they pull the final rug out from under the average person…in other words, we the people are being betrayed by our “trusted” leadership.

    There may be something, after all, to the rumors that Bush is distributing American troops (not to be used domestically) around the Country…in anticipation of what???

    You tell me……..

  16. warren says:

    The infinite horror is yet to come. The French confiscated all church properties in the 1800′s to finance bonds. Because the fiat money system they used was collapsing. I suspect the United Nations will do the same thing to finance a new world currency. That currency will also collapse because the root causes of this debacle have not been addressed. The French had a massive civil war, and wound up with Napoleon. I think we will see the United Nations become fractured down to the city block, and riots, and roaming gangs of looters will be normal.

    “Unless those days were shortened no flesh will live. But on account of the chosen ones those days will be shortened.” Jesus Christ. Mattew 24

  17. [...] geeft onze “muppet” Balkenende toe dat we richting recessie bewegen. In de VS wordt gesproken van depressie. Het einde van de consumptiemaatschappij. Paul Krugman, winnaar van de nobelprijs voor economie dit [...]

  18. Shell says:

    As I sit here and read all the wonderful notes on credit card debt, totally understanding everything noted. It makes me wonder what one would do if they lost hours in job security, lost their home, lost employment to job closer, opportunities to seek employment was rejected or family member becomes severely ill and must be taken care of.

    We have seen increased credit card interests, bills, fuel, food, water, electricity, clothing, car upkeep, taxes and many other items on the agenda that have been increasing for years. Penalties to those whom wish to pay but barely can make the payments.

    As far as savings, 401k it is evident what is happening to that as we speak, whom can save in a day where you can lose your job at any time, and the dime you make each week goes to pay your bills or late fees.

    Now the citizens whom are struggling to at least pay their bills now are having to use credit for food, fuel, bills, and medical. Some folks don’t want to use the credit card but they have to in order to survive. I believe in the American dream but I don’t believe that we should be abused from every end in what things should cost. What about the senior citizens, how is this effecting them, how are they surviving.

    Credit has been known as a bloodline of America, and it is the fraud and the abuse of overpricing and misuse of spending tax monies that has done this to the people.

    If the car stops running and you have no extra cash left after paying your bills, you have an emergency credit card in the slot of your wallet, not knowing to many folks and family help is out of the question, what is your plan of action?

    Survival, Credit Cards.

    Wish I didn’t have to use it but the evidence is clear.

  19. Kent says:

    Hey, I just started listening to Dave Ramsey. Great insite and useful tips regarding how to become debt free. An earlier comment about credit cards are only as good or bad as the people using them is off the mark. Credit card companies prey on people who are uneducated about money and credit. They misrepresent the truth (lie), they lure in the dumb and then jack up interest rates. People need to get out the scissors. Pay cash, you can save up for an item more quickly than you can pay it off plus 12% interest.

  20. [...] Everybody should read this article. Sharon Astyk has done a fine job. Almost all of the consumer spending we’ve done in the last few days has been done on credit. In November and December, retailers see more than 40% of their annual sales – and since the average American comes out of the holiday season with more than $800 in credit card debt, it is safe to say that retailers in general are dependent on an annual payback that is then amortized over mos tof the year in the form of personal credit. That is, the consumer spending economy, 70% of our total economic activity, is utterly dependent on consumer credit. And whether that’s a good thing or not, the destruction of consumer credit lines will bring about a shift in consumer spending that makes the present economic woes looks petty. [...]

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  30. Credit cards are required for money management.You can keep your money in an interest savings account for the entire month, and draw interest to pay your credit card bill.Credit cards are required for building credit.

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