The worst type of debt is consumer debt.
One reason why consumer debt is so bad is due to people buying things they really don’t need: a fifth pair of designer jeans, another luxury watch, every electronic gadget imaginable, and so forth.
But egregiously high credit card interest rates are the main reason why consumer debt is the worst type of debt for your finances. If you keep revolving credit card debt, you will likely stay poor forever.
Let’s take a look at the current average credit card interest rate.
The Average Credit Card Interest Rate
According to the Federal Reserve Bank Of St. Louis (FRED), the average credit card interest rate is a whopping 17% as of mid-2019.
If you want to know what financial highway robbery is, this is it folks. Credit card interest rates are at their highest level in 25 years despite treasury bond yields coming down during this time period.
Not even the great Warren Buffett has outperformed the average credit card interest rate in his illustrious investing career. Therefore, if you hold revolving credit card debt, pat yourself in the back for beating Buffett, but in reverse!
Below is the average credit card interest rate by credit score and type of credit card according to Wallethub, a credit card lead generating site. Their data shows the average credit card rate is even higher than the data from the Federal Reserve Bank of St. Louis.
The average credit card interest rate has risen about 4.6% since mid-2014. Directionally, it has followed the fed funds rate higher. However, the fed funds rate has only increased by 2.5%, meaning that credit card companies are earning an even higher spread on consumers.
Do you really want to let credit card companies make 3X more off you than the prime rate? Of course not, unless you like getting mugged in a dark alley every month.
Remember, stocks have historically returned between 8-10% a year since 1926. But from 1999 – 2018, the S&P 500 only had a 5.6% annualized return. Even the best performing asset, REITs, only showed a 9.9% annualized return for the 20 year period.
You have no business outperforming the best asset class over a 20-year period by 7.1%.
Treasury Yields Collapsing
What makes an average 17% credit card interest rate even more nefarious is the fact that treasury yields have been plummeting since 2018.
You can see from the chart below that the 10-year treasury bond yield is close to a 5-year low.
Credit card interest rates should be plummeting along with treasury bond yields, but they are not because they are tied to the fed funds rate and the Fed is behind the curve. Therefore, stay away from credit card debt and refinance your mortgage instead.
The strength in the bond market is telling us that economic growth is expected to slow. Yet, credit card companies continue to press higher, as if they’re trying to squeeze every last drop out of the consumer before everything goes to hell.
The Fed cutting rates has historically been a signal for rough times ahead. Yes, credit card rates should drop a little bit, but not nearly as much as you hope. Please make sure all your finances are in order.
Avoid Credit Card Debt
You’re never going to reach financial freedom if you have revolving credit card debt. Your debt will likely grow faster than you can pay it off because average wage growth is only about 2% a year.
If you must buy things you don’t need, at least make enough money from your investments to pay for such goods. This way, you’ll always be winning before splurging.
Using a credit card is great for buyer’s insurance, rewards points, and convenience. Just don’t let credit card companies take advantage of you.
Finally, the easiest way to potentially make money off usurious credit card interest rates is to buy publicly traded credit card companies like Visa (V) and Mastercard (MA). If you can’t beat them, join them, right?
Just know that Visa and Mastercard are already up about 40% (!) for the year. If the economy turns sour, these companies will probably underperform the S&P 500 as default rates shoot up.
There are also plenty of credit card and personal loan lead generation startups you could join as well. But if you do, I’m not sure how good you’ll feel coming into work each day.
Readers, why are people getting into credit card debt when interest rates are so high? Should we implement more regulations on who is allowed to get a credit card in order to save people from themselves?
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