If Cash is King Why Is The Credit Card Industry Reigning Supreme?

This article originally published in West Orlando News Online.

What happened to the phrase…”Cash is King?” Or, our family should wait to make that big purchase of a car or major appliance (or any other big ticket item) when we have saved enough “cash” to make that purchase. Or better yet…the beauty of lay-a-way (not rent-to-own.)

What’s wrong with making weekly or monthly installment payments until paid in full, and having to wait a few months for that living/dining room set or big screen TV? These options would definitely cost far less in the long run than charging on a credit card… and digging the family deeper into debt.

 When did the Black/African-American community lose the common sense to save for their future? When did they become lulled into submission that it was a good idea to make purchases without having the cash in hand? Our parents and grandparents were usually never late paying their bills, keeping the refrigerator pretty full with food and a roof over the family’s heads every month, because they lived within a budget. They also paid off their homes, sent children/grandchildren to college working minimum/middle income wage jobs. So how were they able to do more with less money?

 Maybe past generations were able to handle their finances more efficiently, just because they had to! They could account for almost every penny that was spent because they lived within a budget. In addition to that, our elders knew that the only way to keep their heads above water was to make sacrifices for the betterment of the family unit. They were not given instant credit to rack up thousands of dollars of debt. Maybe that was a blessing in disguise. Today, almost every time you get to the cash register in a major department store, the clerk asks if you want to apply for a “store credit card”. You are also enticed with a 10%-25% savings on your purchase when you apply for the card before you check out, if you qualify. This is like asking “do you want to super size your purchase” by getting deeper in debt?”

In the late 1960’s through 1980’s, hundreds of thousands of Blacks/African-Americans were able to go to college. This gave the Black community a jump start in getting into higher paying careers. According to the website Demos.org, “The Color of Debt: Credit Card Debt by Race and Ethnicity,” Blacks/African-Americans did not have equal access to credit until deregulation of the lending industry in the 1980’s which led to a “deluge of credit for consumers of color, but at terms and conditions that were often economically detrimental. The Credit Card Debt Household Survey of Low and Middle-Income Households” conducted by Demos in 2008 found that there was a “burdensome level of monthly debt obligations of communities of color which often places families in precarious financial straits and impedes their ability to build assets.” (Demos.org, August 31, 2010 article by tale Garcia)

 It seems as if the past thirty years of obtaining more and more debt has left the African-American community in worse financial condition than coming out of segregation. Was this feat purposely designed, like the redlining in the housing industry to keep African-Americans from buying homes in certain areas? Every major retail product and service provider is standing in line for their part of the over $900 billion of income from this community (anticipated to reach one trillion dollars in 2011.) Black/African-American families today, have become one of the largest (if not the largest) consumer group in this country (maybe the world) …and have the largest amount of debt versus the amount of income.

Hundreds of millions of dollars have been spent on research on how to best reach this lucrative market of “spenders.” Major credit card issuers even have representatives on college campuses to hand out credit cards like candy. These companies are targeting the next generation of African-Americans who will be seeking corporate management positions with potentially even higher annual incomes. Many graduates will leave these higher learning facilities with thousands of dollars of credit card debt in addition to student loan debt.

Although the African-American may be more educated in book learning and how to get a job, they still lack the financial education that other ethnic groups have passed down for generations on basic money management principles. Here’s a quick look at some statistics of the Black/African-American community and their indebtedness to the credit card industry.

In December 2009, about 35 percent African-Americans said they had at least two credit cards. Around 26 percent of Americans stated they did not pay all of their bills on time, but in the African-American community that number was almost double at 51%.

Going back to 2004, of the African-Americans households with credit cards, 84% of them had credit card debt compared to 54% of white households.

One of the most startling statistics is that more than 90% of African-American families with incomes between $10,000-$24,999 had credit card debt.

 So, in the case of credit card debt… WHAT YOU DON’T KNOW CAN HURT YOU. Not understanding how money works and the principles of compounded interest on these purchases will keep financially illiterate consumers in debt for decades to come. CreditCard.com has a “Minimum Payment Calculator” which gives an example of paying the least amount ($25.00) per month on $3,000.00 of credit card debt. At 17% APR* interest the consumer would take approximately 126 months or 10.5 YEARS TO PAYOFF the original $3,000 of debt and pay over $2,200.00 in interest. The majority of the items purchased will be thrown away or no longer used by the time they finish paying for them in 10 years.

 The U.S. Securities and Exchange Commission’s (SEC) online calculator shows that if you put that same $25.00 per month in some type of savings/investment account with a very conservative 4.00% annual return for the 126 months (with annual inflation adjustments) the ending balance would be $4,707.76. This particular savings calculator demonstrates “how a consistent approach to investing can make your money grow. Whether saving for a house, a car, or other special purchase. The savings calculator will help you determine the right amount to save on a regular basis to achieve your goal.”

Think about it, most wealthy people use cash or use the interest from their savings/investments for purchases. THEY ARE DEBT FREE and determined to stay that way. Therefore why are so many African-Americans living pay-check-to-pay-check, spending money before they actually earn it? Bottom line is the African-American community needs to become better educated in how money really works, start protecting their income and get out of the debt trap. This is a major hurdle that must be overcome in order to create more economically stable households for future generations.

For more information on programs that show you how to eliminate debt quicker, debt consolidation and income protection, contact Larry or Darlene Robinson.

 Note: * APR is the annual percentage rate on the credit card. In other words, it is the amount you will pay in interest charges per year. If you do not pay off your balance in full each month because you will be charged interest on any interest charges that are not paid in the preceding month, and any penalties and fees will be in addition to the annual interest calculation. http://creditcards.lovetoknow.com/What_Is_APR

(Sources/Resources: FINRA Investor Education Foundation, “Financial Capability in the United States,” December 2009; FINRA Investor Education Foundation, “Financial Capability in the United States,” December 2009;National Foundation for Credit Counseling, 2009 Financial Literacy Survey, April 2009; Demos.org, “Borrowing To Make Ends Meet,” November 2007; http://www.creditcards.com/credit-card-news/credit-card-industry-facts-personal-debt-statistics-1276.php#African-American; http://www.ssa.gov/ ; http://www.sec.gov/investor/tools.shtml )

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