Some Simple Math

Last modified on May 6th, 2009

I ran across this article this morning about credit card debt, and started trying to figure out what it meant in terms of numbers.

Nearly 80 percent of American families have at least one credit card, 44 percent of families carry a balance on their credit cards, and Americans pay about $15 billion a year in penalty fees, according to Treasury Secretary Tim Geithner’s office.

The current population in the US is around 305 million (2008 census). I don’t know how many families are in the US, but let’s take a rough stab and there are about three people per family, or around 100 million families. If 44% of those people typically carry a balance on their cards, then we’re left with about 44 million families that carry a balance on their credit cards monthly. So, if we take $15 billion dollars and spread that out over 44 million people, we get about $340 a year in interest charges per family.

Let’s say everyone put their $340 in a pot and called it a charity donation for the year of 2010, and that money became a life long income fund that made around 5% per year. That would mean that $15 billion dollars would generate around 750 million dollars a year. What could be done for 750 million dollars a year?

  • You could feed about 11 million kids in Africa for the year [1]
  • You could give health care coverage to 117,000 Americans [2]
  • You could buy 75 million acres of rain forest and ensure it never gets destroyed [3]

$340 isn’t much of a vacation these days, but it’s definitely a weekend away in a nice bed & breakfast or something. I think the quote that sums up the article the best is this one:

“Debt is not a tool; it is a method to make banks wealthy, not you,” says Ramsey’s Web site, where users can find blunt advice on how to deal with creditors and develop sound money habits. “Debt is dumb.”

I understand that debt is a necessary evil sometimes though — I myself had to get around $40,000 worth of student loans to finance my education, and can’t even imagine how much interest I’ve paid in the mean time. That being said, I’ve been trying for the last year or so to pay off my credit cards in full whenever I purchase something (which I typically did anyways, but sometimes got lazy or forgot).

3 responses to “Some Simple Math”

  1. Andrea_R says:

    There’s a logic flaw in there. 🙂 Or something , anyway.

    many people carry a credit card debt because *necessary* expenses exceed their total income. there’s a reason that you can now buy groceries on your credit card.

    Tons of studies have been done out there too, showing how the poor actually pay more for some things, and are pretty well forced to make bad long-term financial decisions because there just isn’t enough income.

    I know plenty of people where an extra $340 doesn’t mean a nice weekend away – it means they don’t get kicked out of their house this week, or they get to eat better, or they can use electricity.

    (but at the same time, that $340 is still being spent over the course of the year because the CC is keeping them off the street)

  2. Duane Storey says:

    Yah, you’re right. Basically their income is less than their expenses. Yah, that $340 isn’t real – it’s money going to service debt. So the assumption is that they’d have to pay off that debt first to have that money back.

    But most of the people I know using credit cards (and overspending on them) are typically related to “wants” and not “needs” — vacations, trips, nights at the bar. I think for most people if they cut up their credit cards and switch to cash only, they’d be forced to make changes to get out of short term debt. I mean, short term debt (CC) that continues to accumulate only makes their financial situation worse, never better.

  3. The math may be simple but frequently the decisions people have to make, as Andrea illustrates, are not.

    However I do think the point you make is interesting and worth considering. It reminded me of where you can make a $340 donation work more than once, by lending it rather than donating it. When it’s paid back you can lend it again.

    Whether or not you are in a position to pay your CC off each month, or support kiva the point for me is that you are thinking about it. That, as they say, is half the battle (or at 10% over a 2 year term more like …)

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