The Bottom Line

Trapped with credit card debt? So's the rest of America.

“Never spend your money before you have it.”
-Thomas Jefferson

Old T.J. got it right 200 years ago before the advent of credit cards, and on Wednesday, the Federal Reserve’s consumer credit report confirmed that Americans were finally beginning to follow this advice. Credit card debt is down 9.7% from $2.567 trillion to $2.56 trillion, or a change of $7.8 billion.

Why do Americans have so much credit card debt, even in this economy? The underlying theory of credit cards is that customers can spend money that they may or may not actually have.

Example: Your credit card limit is $1,000. As a student, you only have $500 in your checking account. Over the course of a month, you spend $500 on groceries, but then on impulse, you decide to buy a $500 Wii and charge it to your credit card because you figure, “Hey, I still have $500 on my credit card that I can spend (even though I might not have the same amount of money in my checking account)…let’s buy something with this money that I don’t actually have!”

Increase the numbers a bit, change the items bought, and multiply by millions of people, and you get $2 trillion of credit card debt.

As students, we’re told to “protect our credit” by using debit cards linked to our checking accounts, so the temptation to spend more money than we actually have is removed. If, however, you feel that you have more self-control, try getting a credit card with a low credit limit at first, say $300 or another amount that will let you spend as needed during the month, but your checking account will be able to pay off at the end of the month. This way, you’re minimizing the temptation to overspend, while building a positive credit history that can only help you once you get out of college.

Angela Hu Personal Finance, The Economy credit cards, debt, quotes