Credit Cards and Mental Health

Posted on | March 24, 2009 | Comments Off on Credit Cards and Mental Health

High levels of debt are adding to overall anxiety

In a current survey of fear levels sponsored by Woodbury Commons, over half the respondents stated that loss of job or income was a major source of distress. Not a surprising result under the currrent circumstances. We’ve known for some time that there are strong linkages between financial security and mental health. Abundant studies have confirmed that financial insecurity creates panic and anxiety, as well as reinforces feelings of powerlessness and failure.

One modern-day tool that lives at the crossroads of fear and ecstasy, and finds itself in the middle of our current dilemma is the credit card. For all of their utility and convenience, these plastic devices, in many hands, encourage people to spend more then they have, and they reinforce extravagance while trapping many in revolving debt. Money supporting late fees and interest is sucked out of the economy with little benefit to society, unless of course you happen to run a credit card company.

Up until recently, this has been a highly profitable sector. With over 1.5 billion cards in circulation in the US, and with the economy essentially flat, borrowing by Americans using credit cards grew 30% in the first 6 years of this new millenium. In response, company profits jumped 45% between 2003 and 2008. But now the tide has turned and many people – in fact over 7% – are unable to make their minimum monthly payments.

That makes the companies nervous. You see, people who fully pay their monthly credit card bill are not particularly good customers. The company prefers individuals who spend a lot each month but only pay the minimum. Affectionately called "revolvers" by the companies, these customers are perpetually caught up in a revolving door of debt, interest and late fees. And the interest levels they pay, especially in a flat economy with no inflation, are extraordinary. The average credit-card interest rate in the US today is extremely high compared to the prime rate.

What’s most amazing is that many caught in the cycle feel they have no options when they actually do. First, they could cut up the card and control spending. Second, for some, they could shift income and be much better off. Let me give you one example: I recently spoke to a young parent who had about $5000 in credit card debt for which she had been making minumum payments for over a year. At the same time, she had continued to contribute about $5000 a year to her 401K plan, which was not matched by her employer any longer. The money was being placed in an insured income fund, where she felt it would be safe from market turmoil, and was making about 2%. Had she done the math, it would be clear that paying off her debt rather then contributing at the moment to her future retirement could give her 18% versus 2% benefits. Relieving oneself of high interest debt in this economy is the best investment you can make.

The point is this: When it comes to finances, fear, and decision making, you need to stay calm, think logically, control urges to spend, and check the numbers. Some times the best solutions are right under our noses.