Are we headed to another financial meltdown? After credit card balances dropped in 2020, what’s happening now? At the end of 2022, credit card balances hit nearly $1 Trillion! What does this mean for our economy? What does this mean for YOU? Chris Miles answers these questions and what you can do to prepare for this potential collapse, even if you have no credit card debt.
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The Credit Card Collapse
Thank you for tuning in today. I appreciate you bingeing and sharing this show with others. You guys are creating powerful conversations because you are not just doing this privately. You are talking with other people, colleagues, friends, coworkers, family members, and whomever it might be. You are having these discussions to have a better life. That is powerful. From my own experience, that is how I started out.
I remember listening to an AM talk radio show with real estate investors. This is going on now. Seventeen years ago, I was listening to those guys and then having conversations with other friends and family members. Not only did they help me apply these principles and make it work in my own life to become financially independent, but they helped others as well. That is why we are here today. That is a ripple effect we are here to create. Thank you so much for being a part of this. If you haven’t done so already, go check out our website, MoneyRipples.com. We got a great passive income calculator to show you what you can create in the next twelve months. How much passive income can you have? Check that out and try it today.
I want to share an article that I found recently. This is the news that has been happening. If you have been watching certain news stations, some highlight it more than others, and you have been hearing about credit card debt. The real question is this. Is this at the point where there is going to be a big economic collapse partly due to the credit issues that we are having, specifically credit card payments now being higher and credit card balances being higher than ever before in history? That is what I want to talk about.
This particular article is in Yahoo Finance. You can find it there. It says, “Troubling signs emerge as credit card debt hits record high.” What does this record high mean? Credit card debt has now hit almost $1 trillion by the end of 2022. This is regarding the fourth quarter. It is saying, “The fourth quarter was the biggest growth. It was a $61 billion increase, going up to $986 billion.
I mentioned this a little ways back. I can’t remember which episode it was now. I believe it was towards the end of the year or the beginning of this year. We were talking about how people were not necessarily doing great on Christmas Day when they were buying on Christmas Day. When there were consumers going and buying goods, a lot of them were putting this on credit. Not just credit cards, there were even stores offering a deferred payment type system. It is more of a buy now, pay later type of option that they had.
This wasn’t reported in the news a whole lot, but it was a big thing. Even if we are talking about this right here, that is not the same thing. We are talking about an actual serious situation where people thought, “I can do it fine on Christmas, and Christmas sales were okay.” They were okay because it was a pay-later scenario, not a buy-now ability. That is the one big problems we are seeing right now. We see this big influx. Over the last year, that is an increase of $130 billion. Think about it, it’s almost $1 trillion. $130 billion increase just in the last year.
We already knew that inflation had been increasing dramatically over the last year. That is one of the big things they lay blame for. We have an increase in food costs. We saw an 11% increase in 2022 in food costs, from January to January. We saw huge increases. Even here, they talk about how auto loans have also increased. The bigger concern is this. It says in the third paragraph, which will tie to the auto loans too. It is said, “At the same time, the rate at which credit card holders missed payments or became more than 90 days behind was higher than before the pandemic, especially among younger borrowers. Potentially wearing a sign that when the student loan pause lifts later this year.”
What they are saying is, “Credit cards, we are going 90 days or more behind on making the minimum credit card payments.” Interest rates have also increased. It says that the average interest rate is now near 20% according to bank rate, which is bigger than it was even from the last almost 40 years.” Some of the highest credit card rates we have ever seen are happening now. If those go up, payments go up. At the same time, if inflation is going up, affordability goes down. This adds more stress.
With auto loans, for example. They said, “Auto borrowers are also having trouble keeping up with their monthly payments, especially among younger borrowers. The higher interest rates largely can’t be blamed for this increase.” Why? It is because they are fixed payments. What happened is the rates have gone up on new loans, which doesn’t help. Remember, we also saw auto loan prices go up too. Automobile prices, in general, go up. We are seeing automobile prices go up and interest rates go up. We have also seen, in general, people’s spending has to go up to stay at the same standard of living. The affordability squeeze is killing people.
I have even mentioned this in 2021 or early 2022. I mentioned that there could be an issue with all this inflation. This could squeeze people out. Even just having 10% inflation, but your income doesn’t go up by 10%, you are in trouble, especially if you were already paycheck to paycheck prior to this happening. Even worse, younger borrowers are not making these payments. The student loan program comes due. It is supposed to end, the deferment that we have had since 2020. It is supposed to stop in June of this year. We got another three-plus months before a lot of this crap might hit the fan.
This is what is concerning to me. It’s not just the credit cards. I believe that credit cards are a natural consequence of the affordability factor happening right now. I do believe there are some other factors too. I’m generalizing here. I know there are good wise stewards in their 20s or 30s. They are great people and good with their money. They manage it well. I’m not putting this as a blanket on a complete generation of people. They are saying the young borrowers are the ones that they are noticing a much bigger delinquency increase.
Here is what has happened, and this is true even with people outside the younger generation. I have seen this even with people in their 40s and 50s. What happened is that there is a law out there called Parkinson’s Law. I don’t mean the disease. I mean the law. If you put it in scientific terms, space supports a vacuum. If there is a vacuum in space, something wants to fill it. In your situation, if you free up time, naturally, that time wants to be filled.
We saw this with all the shutdowns that we had with the pandemic. People were saying, “I got all this time on my hands. What do I do?” You don’t hear people say that anymore. You don’t hear people at all say they have time on their hands. They probably feel more stressed, busy, and distracted than ever. Furthermore, we also see people with money. This happens as well. This happens if you ever have an increase in pay. Within about six months or so, you feel like life is normal. You don’t feel as free or relaxed with your money as you were prior to that.
If you pay off a loan payment, you pay off maybe $400 a month on a loan payment and you are happy. You are like, “$400 a month. What could I do with that money?” In the next six months or so, it is absorbed. You are back to spending the same amount as you were before. This is why it is important that if you increase income and/or reduce expenses, you capture it. You give every dollar job, capture right away, and start putting that money away. You give it a job. You say, “I’m going to take that $400 I paid off on that loan, and I put it away into savings.” It does become part of that Parkinson’s Law, but at least the money is not gone.
Unfortunately, what most people do when they free up money or increase their income, the next thing they do is spend more money, and they feel as strapped as before 2020 hits. Tons of people are getting payment forgiveness. Especially student loans were delayed for years. We can only push this off so long before someone is going to have to say, “Kids, it is time to grow up and make your payments.”
I’m not judging you because there were many times I put my student loan in deferral. I did that from time to time, especially when things were tight, but it wasn’t a permanent situation. I used it and then I went back to paying for it again. You have had a deferral for three-plus years. It is time to pay up. The problem is if you have already started to absorb it, whether it is because nationally, inflation, housing costs, and food costs have gone up, but your actual pay stubs have not gone up as much. You are going to feel the pinch. It is a tough situation to be in.
This is why your number one focus right now is you should be worrying about investing. Your focus should be, how do you get your finances in control? Get your finances in check right now and say, “How can I start paying off these particular loans?” Which loans do you pay off? Which ones are the best ones to do? I would bring up an old topic that I have brought up many times before on the show. It is a little formula I created years ago. It has now been fifteen years.
During the last recession, I created what’s called a CashFlow Index. What you do is take the balance of the loan. You divide it by your minimum monthly payment, not the payment you are paying, but the minimum required monthly payment. Divide the balance of that loan into that payment, and you will get a number. The lower the number, the more you want to pay it off. The lowest number is the one you pay off first. Don’t worry about these interest rates, although that is a factor. All things being equal, I would aim for the higher interest rate. That is not what is going to help you out right now because if you aim for the highest interest rates, it won’t always free up the most cashflow. You will still be strapped and might still go late on certain loans.
This is the guy that went over $1 million in debt and was late on everything. My credit score dropped to 481. Understand that a 500 credit score is horrible. With 481, it is almost impossible. You have to be intentional to get a bad credit score like that. I was there. It got that bad because everything was going delinquent. I wasn’t paying hardly anything on time at that moment. There are a few things I did. I did keep one auto loan that had lates here and there, but I was able to pay it enough to keep the vehicle and not have it taken away.
I remember times when I had to hide the vehicle in the garage so that no one would drive off with it. They would have to break and enter my home to get the vehicle. That is how stressful it was for us. I know what it is like when times get tight. We are moving into those times right now. What you should be doing is looking for that lowest cashflow index to free up the most cash with the least dollars out of pocket.
For example, you have a $10,000 credit card. That is $200 a month. You also have a $10,000 auto loan. That is $500 a month. If all you have is $10,000 and you are thinking, “Maybe I should invest it.” The answer is no. Paying off either of these loans would be a better ROI than investing it. If you had $10,000 and you made at least $80 to $100 a month, you would be doing well. Remember that a credit card is $200 a month with a higher interest rate. Let’s say it is 20%, then you got the car loan for 4%, but it is $500 a month. If you are focused on the interest rate, you will aim for the credit card, but only free up $200 a month.
However, common sense and life experience will teach you. Don’t aim for that lower payment. Aim for a higher payment. Pay off that car loan that’s $500 a month. Why? It is because that is where the stress is. It is month-to-month. If you can keep making your payments, you can get ahead. If you can’t make your payments, it doesn’t matter what the interest rate is, you will lose. You will go late and potentially have bigger repercussions like with me, where I eventually had to foreclose upon a house. I don’t want you to ever get that serious condition. To avoid that, this is what I had to do to keep myself from filing for bankruptcy. It was using this formula.
I wanted to go for the one with the highest payment for the lowest balance. That is the Cashflow Index. Divide the balance by the payment and the lowest number you pay off first. In that example, that $500 a month payment on a $10,000 auto loan is a 20. If you are a visual person, write it out. If it is a $10,000 credit card with a $200 a month payment, it is a 50. The twenty is 2.5 times better to pay off than a 50. Pay off that car loan. You can always take that $500, take it to pay the extra $200 a month on that credit card. That is $700 a month. You will pay off that credit card in less than a year anyway. That extra interest you are paying would be negligible and hardly make a difference.
What happens is when you pay that and free up that $500, you throw it down to the loan. Here is a cool thing about this Cashflow Index. If you are looking at credit cards specifically, you pay extra on that principal. The index said that credit card is a 50. That also implies that for every $50 you charge, it costs you $1 a month. For every $50 you pay down in principal, you free up $1 a month.
Guess what happens when you have about $700 a month to throw onto that credit card? If it is a 50, because there are interests as well as the principal being charged there, you will free up roughly about $13 a month. What that means is that now the next month, that payment goes from $200 down to about $187. When you pay that extra $700 again, you are going to see that thing go down to below $170. That payment keeps dropping down, freeing up more cashflow and making it easier to breathe.
That doesn’t work on the reverse when it deals with car loans or mortgages. If you don’t pay them off in full, you won’t free up anything. Be aware that we are talking about putting extra payments on something. Do not put extra payments on your student loans, car loans, mortgages, or anything that is a fixed type of loan payment because that is not going to fix the situation. You have to either pay it off completely or don’t pay any extra on it all. It is better to save it up in savings and pay it off in one lump sum. That is the key.
With credit cards, the payment also goes down as you pay down the balance. That is good. You want that. Take it from a guy who had to figure out how to pay off over $1 million of debt, had no money or credit, and had to get creative. This was a huge strategy for me. This is big. For those of you that are struggling with this situation right now, I hope that helps.
For the rest of you, what does this mean? Maybe you are fine. Maybe in your situation, you have paid off all your credit card debt. You are not worrying about these interest rates right now. You have locked in your mortgage rates. You think you are a hero because you still have a 3% or 4% mortgage rate. I’m happy because I have a 2.75% mortgage rate right now. That is not even inflation. I’m making money from a stupid mortgage. I love it.
Regardless, if you are in that situation, the thing you should be worried about right now is what are banks and credit card companies going to do. The economies are not based on how much money is flowing, although that is important too. It is still money flowing. People are still spending money, and using money is good. Most importantly, the thing that drives the economy is how much credit is available and how much access to capital is there, specifically for banks and others that way.
If people stop making payments, especially if it is not in principal payments, when the money is not coming back, banks can leverage and lend out at least ten times whatever you give them in principal. This is also true when you put money into savings. They have the ability to leverage that. When they get cash back on their hands, they can leverage more. What happens if people aren’t paying that back? What if we start having more delinquencies? What happens in this environment where the banks stop trusting us as US consumers? They will restrict credit. When credit gets restricted, that is when you will start to see a massive recession.
It is already common. They already said that because employment is still hot right now, supposedly, we all know that the employment rate has been manipulated because we have seen layoffs, yet somehow unemployment went down. It doesn’t happen, guys. There are still people unemployed to this day, clients of ours even, that are in the tech industry and are unemployed. That is happening because governments like to fluff their numbers. It is like that phrase I have used several times in this show, “Figures don’t lie, but liars figure.” That is what is going on here.
We have already seen unemployment going up, but because people are considered fully employed when it is 5% or less on the unemployment, they are saying, “This isn’t so bad.” Think about it. If we are fully employed and this is still happening, what happens if there start to be more layoffs? What happens if they restrict credit? What if companies have less access to capital to expand and grow their businesses? They are going to stop hiring as much. We will see more layoffs. I know the Feds know it. They are trying to mention it casually. They don’t want to freak people out. That is a big concern of mine, and it should be yours too.
This could be a big recession that we are running into here. Maybe it is the biggest one you have seen in your lifetime. I’m not saying it is going to be. I don’t think there is going to be a soft landing. Few people are convinced there is going to be a soft landing. Even if it were, that means we are going to be in it longer. How long do you rip that Band-Aid slowly and make the pain go versus ripping it off quickly? We have been in a bubble. It is time for a correction. It is going to happen.
This is good news for you because you are here and learning. I hope you are not just learning but you are finding ways to take action. If you have this debt, pay it off. Get rid of these things. It would be better to free up your money. Get lean and mean. Cut down on some expenses that aren’t serving you right now. I’m not saying cut back on everything. Don’t destroy your life and have no fun in your life and no enjoyment. I’m not saying that. I’m saying, “Be a wise steward of the money you have. Make sure it is being used well.”There is a lot of opportunity right now. That restriction of credit is going to create more opportunities for better growth and for investing. Click To Tweet
Build up that cash and buffer in your personal finances. Build up your savings as well, not just for emergencies. Although you can do that too. We talk about the infinite bank as a way to diversify your savings but also take that money. You can now invest it for passive income. It gives you extra protection in case of a downturn or in case your income is affected. That is important. That is the thing that we are here to do. This is why I’m here doing this.
Although I’m financially independent, the reason I keep talking about this stuff is because I want you to prosper. I want you to feel abundant even when the world around you might seem chaotic, stressful, and scarce. I want you to be able to feel better when you sleep at night, that you know you are safe, and you have something that is going well in your life. There is a lot of opportunity right now.
That restriction of credit is going to create more opportunities for better growth and opportunities for investing. I’m going to keep doing more conversations on this, but I want you to know to be aware, be watching, and be ready. Make it a wonderful and prosperous week.