Credit card debt in America hasn't been this high since 2008. Available money that I don't need to pay off right now and then interest piles up and then you get yourself in a bad situation. Money! It has an interesting quality to it. While it can give immense power to those who possess it, it can also make you vulnerable if you lack it. Vulnerable to traps that lurk on the dark side of the monetary system: be it day-to-day financial problems or something more threatening like debt or bankruptcy. Credit card debt is easy to get into and hard to get out of. And the double whammy is that the average interest rate is 18%.
Money lending industry has always been one of the most profitable industries out there. With credit card companies reaping billions of dollars each year and new digital lending platforms continuously on the rise, the only question that surfaces above all the noise is: Have we all lost the balance of our incomes and expenses? Because for most of us, it all gives the illusion of being harmless on the surface. But would it not be naive not to delve further and see for ourselves what is underneath? After all, it is us who pay all the interest and processing fees. So, you are with me? Then, let’s explore the other side of our monetary system in a brighter light. Because it is all worth it, I promise! In this four part video, we will look at various aspects: from debt itself to the faults in the system and ways to live a debt-free life.
I have left timestamps in the video description so feel free to skip to your favourite part. Sit back and enjoy:) So, the question, what is debt to you? Is it simply the amount you owe to an individual or a company? Or is there more to it? In our pursuit to overcome our financial problems, the way we perceive debt or simply money often becomes incredibly crucial. To better understand it, why not look at the two often-overlooked financial sides of our lives? Production and Consumption. We bring money into our lives when we trade our time to produce something, something in which the market finds value and pays for it according to that perceived value. It could be a job as an accountant where you spend a year crunching numbers and creating some value in the market and get paid 30,000 dollars in return. Or maybe you work as a software engineer where you sacrifice an entire year of your life creating value through an app that solves several problems for the market and you get paid 40,000 dollars in return.
If that is not the case, you perhaps own your business that adds some form of value to people’s lives and, in return, you get paid handsomely in revenue. Or maybe you have some other means of income for example, owning a property that keeps on creating value overtime. Either way, that’s right, your time here on this planet becomes the ultimate currency. And the price of your time is determined by the market itself depending on how it perceives your value. Money leaves our lives as a consequence of our consumption. For example, when we pay rent, utility bills or purchase a piece of clothing, shoes, food, groceries, or a Spotify or Netflix subscription. And, again, the prices we pay for these products and services usually vary based on how we, yes we as consumers or the market, perceive their value. Coming to the point of it all, it is just the balance of our production and consumption that keeps our financial positions intact.
While it is true that increasing our production exponentially, keeping the consumption in check opens doors to immense wealth and financial freedom, well, it is also true that increasing our consumption without considering our production capabilities may throw our entire financial situation onto the dangerous road to debt or bankruptcy. So, does that mean, in order for someone to stay out of debt, all they have to do is work on their production side while watching their consumption? That sounds simple enough, doesn’t it? Let’s take it from the top.
The world is changing. It is the golden age of digitalization. And it seems rather inconvenient to carry those hefty bundles of cash when you can carry a plastic card and make all your purchases. Your credit card saves you time. It is safer. It is easier to use. And it is your most reliable friend in your financially difficult days. Just a simple search over the Internet “why use a credit card” is enough for us to see the merits. One-Time Bonuses. Cash back. Reward Points and the enticing advantages go on and on. Credit cards are selling fast. The entire industry is spending capital to expand its reach. But wait. Students? That does not sound right. Why target a young customer base that is perhaps most susceptible to irresponsible credit card use? Considering that an average student in the US already owes a whopping 32000 dollars in student loan debt. And just glancing through the stats, my friends, one can tell that student loan debt is the second highest consumer debt category.
Even higher than credit card debt itself. I don’t know about you but this kind of behaviour gives the impression that this system is built around preying on the most vulnerable. To be honest here, you would still be profitable to your credit card company if you made your payments on time with the industry standard interest rate. But what if you were to pay 3-4 times that rate in interest? That simply means more profit, doesn’t it? Let’s take a short trip back in time. In 2004, US Senator and former law professor, Elizabeth Warren said in an interview with PBS that no merchant in America can change the price after you've bought the product except a credit card company. After you have borrowed the money, they can change the interest rate from 10 percent to 30 percent once you are late in your monthly payments or right on the edge of bankruptcy.
But there has to be a way. Do these companies even try to draw our awareness to these changes in interest rates and late fees. They sure do. In those complicated contracts that fill pages and pages and pages and are long enough to avoid a lawsuit. And unfortunately, most of us don’t even have the luxury of personal finance education as part of our formal school education system. Let’s say you buy a pack of cigarettes, that clear warning about death on the box paints a vivid picture for you to understand the consequences.
When you are sold a credit card, shouldn’t there be a plain and easily communicable warning about the consequences of irresponsible use apart from those complicated terms and conditions? Afterall, credit card companies are all about the ease of access. They make our lives easier rather than complex. Don’t you think? So, are all these promises and concerns about customers genuine or one big lie? Is it a system where the more we rely on it, the more threatened our financial status becomes? If so, then why do we push ourselves to the edge of this rabbithole over and over? It is time we solved that mystery.
It begins with those sweet, juicy, tempting deals. And suddenly, our deepest material desires transform into desperate needs. Remember that car you have always wanted? It doesn't have to be a dream anymore. Doesn't matter if you have enough money for it. You now have the option to borrow from your future. Just sign up for a credit card! And while it may work for a handful of people, it seems most of us are on the losing side. Which brings us to the most significant question there is: why would still we choose to borrow from our future to fund our present? Why would we make that choice despite knowing that at the end of this road, there may be nothing but debt and financial chaos? And for some of us, the answer may be as simple as the pursuit of an illusion. The idea of a “perfect” lifestyle projected in our minds, because of the dominance of social media.
And don’t get me wrong. There is nothing dangerous about conceptualizing an ideal lifestyle for ourselves based on the world around us. But I do wish we all were more responsible in understanding our behaviour as consumers. If we look up on the Internet, there are sufficient studies and sources available today that suggest that credit cards are designed to hijack our spending behavior. Remember when you pay in cash? There is subconsciously some level of pain associated with that transaction. Some amount of discomfort in the realization of no possible return of that dollar bill. A credit card dulls that feeling of discomfort by creating a gap between the times when you buy something and when you actually pay for it. So, at the time of the purchase, you don’t have to think about the payment.
Isn’t that the best feeling? Come on, who are we kidding? These credit card companies that are valued in billions spend more time studying our behavior than we do ourselves. To them, we are more profitable when in debt with heavy interest rates than financially free. And all that cashback and reward points are just another way to nudge us in that direction. The idea is to spend on us today so we are profitable to them in the future once we are hooked. And trust me, it is easy to get hooked to “spending money when we don’t have to give it a thought.“ Now with all that said, I am wondering “what is the redemption here?” To someone plagued by credit card debt, the most seemingly vague and impractical advice would be to cut down their expenses straight away. We all can agree that the part about "living below your means" has its own place in personal finance. But here we are talking about a practical piece of advice. An approach that has worked for many who have found themselves at the end of the dark tunnel of debt.
Strategic steps towards paying off their dues as early as possible. There are two prevalent methods that personal finance experts often put emphasis on: The Avalanche Method and The Snowball Method. Now, as far as my research goes, I have found that the effectiveness of one of these methods over the other is still debatable. So, I suggest we look at their fundamentals individually. According to the Avalanche method, you start with making a list of all your debts, putting the highest interest rate debt at the top and the lowest interest rate debt at the bottom of the list.
The next step involves making a budget plan and using the spared amount to pay the topmost debt and working your way down the list. The Snowball method follows the same process except the order of the list. It prioritizes the lowest interest rate debt and puts it at the top and the highest interest rate debt at the bottom. It usually favors those who are rather emotional and struggle with sticking to a plan.
The Avalanche method, on the other hand, is more of a logical approach. And for those who are willing to pay off their debt at the lowest interest rates possible, balance transfer cards can be a safe bet to consider. These cards allow the transfer of an existing expensive debt to a rather low interest debt for a specific period of time. Now let’s shift our attention to avoiding debt as most of us would agree that prevention is better than cure. So what is the prevention? A contingency plan is a good place to start. The practice of keeping an emergency fund that covers your expenses for at least three months. It is the most fundamental step that people take to keep themselves financially secure during the times of job loss, medical emergencies and other situations that may arise. The next step would be to keep a journal of your day-to-day expenses.
As monotonous and tedious it may sound to the best of us, it goes a long way towards prioritizing our expenses around our incomes. Not just that, it can also help us plan our future ventures and investments. Also, it is important to ask ourselves every step of the way if we want to choose a future tailored to our personal taste of financial freedom or the one with debt as a fact of life. Because the choices we make today do influence the tomorrow we promise ourselves. Hey, you made it to the end, which gives me a hunch that I managed to provide some form of value to you.
I totally understand that none of us are immune to financially difficult times. But it is important that we make sure credit cards or simply borrowing money on heavy interest rates should be our last resort. ummm... In case of emergencies, it is always best to seek help from family and friends. With all that said, thank you so much for taking the time to watch this video. Please... do let me know your thoughts in the comments. ummm.. My name is Ankit and I will see you in the next video. .