The side effects of credit cards

While I’m not a fan of all the pharmaceutical advertising on television, I have to admit that they can be brutally frank about disclosing potential side effects. If you take something for chronic indigestion, a variety of things could happen which will make you lose your appetite — which at least would make you less likely to suffer indigestion. If you take something for erectile dysfunction, the assorted side effects could really ruin the mood anyway.

The point is, I know next to nothing about medicine, yet the drawbacks of taking these medicines come through loud and clear in their disclosures. In contrast, credit card disclosures list page after page of numbers and financial terms, but they never really come clean about the possible side effects of credit card borrowing. Perhaps credit card disclosure should not just list a series of numbers and financial terms, but should also include a description of the possible side effects of excessive borrowing.

Toward this end, here is a list of some of those credit card side effects:

  1. Credit card debt is like bringing back inflation. Inflation over the past year grew at just 2.0 percent; so while the job market remains tough, at least things are not getting much more expensive — unless you charge them to your credit card and do not promptly pay off the balance. Then, the cost of your purchases could grow at a rate of around 13 percent a year, which is the average rate currently charged on credit card balances. This type of cost increase is like bringing back 1970s-era inflation, something which no one is nostalgic about. In fact, the low level of current inflation makes adding credit card interest to your costs especially burdensome by contrast.
  2. Borrowing creates an exaggerated lifestyle expectation. There are poor, middle-class, and wealthy people who are all content with their lifestyles. What people tend to feel most strongly about is a change in lifestyle, either for better or worse. Borrowing creates the illusion that you can afford a better lifestyle than you really can. Since borrowing cannot be sustained indefinitely, that means at some point your lifestyle is going to have to downshift. This is likely to be felt as more of a hardship than if you had simply maintained a more modest lifestyle all along.
  3. Borrowing creates a drag on future growth. This is both a macro- and micro-economic concern. From a macro-economic standpoint, a problem overhanging the United States is that huge levels of public and private debt outstanding represent past spending that must be paid for in the future. This will subtract from the money available for future spending, resulting in chronically slower economic growth. Now imagine the same thing on a household level — debts have to be repaid sometime; and when they do, your household budget is going to miss that money.
  4. A debt burden makes the consequences of a career setback more severe. A common reason people borrow is that they expect things will get better for them financially in the future. When the country was in an era of consistently high employment and steady earnings growth, there might have been some logic to this, especially for younger people. Now though, unemployment has remained stubbornly high, duration of unemployment can be very long, and wage growth has been sluggish. If you have a setback instead of a step forward, what was once a manageable debt burden can quickly drive you to the verge of bankruptcy or foreclosure.
  5. Debt makes the future something to fear rather than to welcome. One of the things that defines how happy you are is whether you are optimistic or pessimistic about the future. The hope of a better future has traditionally been a characteristic American value, but having a debt burden hanging over you can make the future something you fear rather than enjoy. The problem is not just the size of the burden, but how certain you are about how you will repay it — the bigger the uncertainty, the greater the fear.
  6. Debt disrupts generational continuity. People living in the same house for decades, the next generation finding jobs near their home towns, and simply having some consistency in their careers and income levels were all things that brought a sense of continuity to American families. These days, a variety of economic disruptions, including debt, have greatly challenged that continuity. Foreclosures, job losses, and business closures have made change — sometimes sudden, drastic change — a fact of life that can split families apart.

Of course, as with pharmaceuticals,  credit cards can normally be used safely and effectively. Even so, I’ve seen all of the above side effects play out in the lives of friends and acquaintances. The more people know about the potential side effects of borrowing going in, the more likely they would be to avoid them.

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2 Responses to “The side effects of credit cards”

  1. Anonymous

    Thanks William, and your point is right on the money – debt takes away your financial flexibility, and it is difficult to get through a downturn without some flexibility.

  2. Anonymous

    I love the way you presented this. One more side effect: credit card debt will turn the speed bump of the next recession into a full-scale disaster. You can cut expenses when you’re laid off, but you can’t cut our debt service.

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