According to a recent ING survey, 28% of Americans turn to credit cards when they run out of money. This is instead of other options presented to respondents, such as borrowing money from friends/family or, better, reducing spending.
That’s a projected 39 million Americans — far more than the 12 million Americans estimated to use payday loans this year.
Granted, credit cards’ average rate of 15.96% is a far sight better than payday loans’ nearly 400%. But you run into the same problem of the debt cycle. That is, the amount you borrowed from the previous month eats into your latest paycheck, leaving less to cover your expenses, increasing the chances you’ll have to borrow again.
But credit cards add a new wrinkle: You can opt to just pay less than the full balance. Then you’re incurring interest, so even if you have enough money to cover the following month’s expenses, you’re still being dinged. Or more likely, you’re earning interest and still don’t have enough money to cover all of the month’s expenses. Meaning you’ll put more on the card until the debt just builds and builds.
No wonder 41.2% of households carry some amount of credit card debt. Heck, no wonder the average credit card debt for balance-carriers is $9,333!
Not to mention that if you choose to get a cash advance, the interest starts accumulating daily immediately following the withdrawal. There’s no grace period the way there is with a regular credit card charge — and the interest rate tends to be higher for an advance than for a regular purchase.
So, really, how can you see credit cards as anything other than a payday loan?
Well, because unlike payday loans, credit cards can be used without incurring any fees. There are cards with $0 annual fees and, if you pay the balance in full and on time, you’ll never pay a cent of interest. Compare that the payday loans where it’s common to pay $15 per $100 borrowed.
And if your income is high enough, it’s not difficult to charge everything to the card and pay it off in full each month — without dinging your ability to cover all of your bills for the following month.
Of course there’s the rub: if your income is high enough. That is, if your income exceeds your expenses and you’ve had enough to create an emergency fund for unexpected bills. That’s a luxury not everyone has.
Perhaps some of that is their own fault — plenty of people don’t go to great lengths to lower their bills/general spending — but a lot of it is simply wage stagnation and the growing divide between classes in this country. The latter meaning simply that while some, like myself, are lucky enough to have landed high-paying jobs, others have careers that barely (or don’t) pay the bills.
And yes, to an extent you create your own luck: You choose to study for a good-paying field in college; you work your butt off to get promotions; etc. But plenty of lower- and mid-range income people work hard too. They just have different passions or skills that led them into lower-paying jobs, or they didn’t have the opportunity to go to school for the high-paying jobs.
The point of all this is to say that even not everyone has the ability to pay off credit cards each month, which means that anything they put on the card is automatically a payday loan.
In those cases, credit cards are dangerous — but necessary — things, much like payday loans.
If your car breaks down, you need to be able to pay for repairs because you may need that car to get to work. (Remember, not everyone has easy access to good public transit, nor does everyone live within biking distance of work.) If your kid is sick, you need to be able to pay for medication that will make him or her better.
When I was in my 20s and struggling to find a job I could do full-time, I couldn’t afford insurance, which meant my antidepressants were full cost. I couldn’t cover $600 a month, so I put them on the card and paid what I could afford each month. But every month my balance grew. By the time my mom came to Seattle and started taking care of me financially, I was about $3,000 in debt.
In these types of cases, a credit card is a double-edged sword. It’s both a godsend, covering what you need but can’t afford, and a gateway to the aforementioned debt cycle.
So what can you do to avoid or get out of the debt spiral?
Well, first and foremost, the probably-obvious first step is to track your spending and trim it wherever possible. Take those savings and start an emergency fund so that you can afford to pay any unexpected bills.
If your income doesn’t exceed your expenses, look for ways to make more money if that’s at all feasible for you. Sell things on eBay or Etsy, drive for Lyft/Uber/DoorDash/GrubHub, petsit via Rover.com, sell your plasma — anything to help you boost your revenue.
If it isn’t, look into social programs that can help you at least cover your bills. My mom’s first book, Your Playbook for Tough Times, has a lot of suggestions for government programs and charities that will help you lower and/or pay your bills.
Once your expenses are less than your income, tackle any debt you already have. But first get a credit card with an introductory 0% APR and do a balance transfer. The 0% rate generally lasts 12-15 months, which gives you time to pay down your debt without incurring more interest.
In the meantime, keep building your emergency fund to cover unexpected expenses so that you don’t have to use your card to cover unforeseen bills. Or so that you can use the card to get any rewards but then pay it in full at the end of the month.
In short, do whatever you can to get out of the debt cycle — except take out a payday loan, that is.
Do you ever think credit cards could be another payday loan? Have you ever been stuck in the debt cycle?