The End Of Credit Cards | A Warning To Credit Users

What's up, guys? It's Graham here.

So, as many of you know, I take my credit card usage very seriously. And I say the term "usage" because when I tell people I have a hobby collecting credit cards, they look at me as though I've gone crazy and have a problem. I'll tell you, my only problem is that the Chase Sapphire Reserve increased their annual fee to five hundred and fifty dollars a year, and now it no longer makes sense to keep in conjunction with the JP Morgan Reserve. So those are the problems that I deal with. But more on that later, because today we got bigger fish to fry.

That's because new data was just released, which found that fifteen million Americans had skipped their credit card payments. That represents a 10,000 percent increase from the year prior. Yes, you heard me correctly; not paying your credit card just became 10,000 percent more common, and now represents 3% of all credit card users.

Anyway, let's discuss exactly what's going on, what this means for the future of all credit card users, and how this affects you watching. Not to mention, this could be a very severe sign of what's to come, because if this trend continues, we could be in for very rough times ahead. So, let's go and dive further down this credit card rabbit hole right after I—hold on one second—right after I smash the like button for the YouTube algorithm. That's right! I'll come clean; I like my own videos. So if you ever get to my video as soon as I post it and you notice there's already a like, I just found it helps get the ball rolling. So there we go! I did my part, and now let's begin the video.

First, let's go for the basics and cover some of these headlines. We've got millions of Americans who are now skipping their credit card payments. This represents users who declare financial hardship, which allows them to temporarily defer their payments interest-free for a preset period of time. This is also during a time when almost half of America is in credit card debt, with almost one-fourth of those people adding to their credit card balance as a direct result of the illness.

Even worse, 40% of those people can't afford to make more than the minimum monthly payment. And this isn't just my own generation; the hardest hit is all you fellow Millennials out there! Comment down below because one out of every three of us recently had to increase our credit card debt out of necessity. The cherry on top of all of this is that we now have articles coming out talking about how consumer debt hit an all-time high, now surpassing 14 trillion dollars.

But how severe is all of this? What does it mean for all of us watching? And how do we know whether or not we're going to end up in another great depression, or if it really isn't that big of a deal and it's just blown out of proportion again, like most of the clickbait news article headlines?

Well, as it is right now, the outstanding credit card debt is not looking so good. By the end of 2019, Americans had accumulated roughly nine hundred and thirty billion dollars in credit card debt, and that works out to be an average debt of fifty-seven hundred dollars per person. Just like you would expect when you go and break this down further, it was found that the people who have the lowest household net worth are the ones who have the highest amount of credit card debt, likely because they have no other option other than to use a credit card to pay for the essentials.

Because credit card interest rates could be ridiculously high, it makes it extremely difficult to pay off if you can't afford to make more than the monthly minimum payment, which, like I mentioned earlier, represents 40 percent of all credit card users.

Now, on the surface, you might think, "Wait a second. Credit card companies must love this! The more debt people pile on the credit cards, the more the credit card companies make. Genius! I should go and invest in credit card companies' stock!" And if you think that, you're not exactly wrong. But credit card companies don't just make money through interest payments. Instead, they make their money through three different ways.

First, credit card companies make money through what's known as interchange fees. This happens every single time you use or swipe your credit card. And when you do that, the credit card company collects a small 2.7 percent processing fee from the merchant. So even if you never pay interest and you always pay off your balance in full, credit card companies are still making money. As you can see from American Express, they make more money from processing fees than they do from interest, and many other companies get about ten to twenty percent of their total revenue from this as well.

Second, as we just talked about, they do make money from interest payments. Obviously, if the credit card charges you twenty-five percent interest, that money is going straight into their pockets. And as I'm about to show you, owning a credit card company could be extremely lucrative. American Express made three point two billion dollars from interest payments. Capital One made over ten billion dollars. Chase made over nine billion dollars, and our favorite, Discover, made over seven billion dollars from people who didn't pay off their bill in full.

Now, of course, it's important to mention with this that not all of their interest income is profits, because there's a portion of people out there who just charge up a credit card and then never pay it off in default. So across the industry, it's estimated that 10 percent of credit card users end up doing this, leaving them with about a 90 percent profit margin on interest.

And finally, credit cards make money from one of the things I dislike so much, and that would be fees. This could include the annual fee you're paying on a lot of the rewards cards out there. It might be a late fee or a balance transfer fee or a cash advance fee.

So, given all of that, for the credit card consumer, things are not looking so good. With a $5,700 annual balance and an average of a 20 percent interest rate, that means that people on average are spending about $100 a month on interest payments.

And that brings us to the headline today: Why have so many Americans stopped paying their credit cards? Well, the obvious answer is the illness that I can't say because I'm still not sure whether or not YouTube demonetizes videos that mention the illness. So, I would rather be safe than sorry and just refer to it as "the illness."

Anyway, due to businesses being shut down, people forced out of work, and mandatory stay-at-home orders in many states, lenders understand that collecting payments over the next few months might be a lot more difficult if people run out of money and then have nothing left over. So, in an effort to help curb defaults, many lenders have provided temporary financial hardship assistance waivers.

Credit card users can essentially raise their hand and temporarily pause payments—interest-free, penalty-free—for a few months, with no impact to the credit score at all. In fact, this was so common that practically anytime I logged into my American Express or Chase Bank account, there was a big banner up there that asked if I was impacted by this illness. And if so, it was very easy for me to go through and pause payments.

Even though I didn't do this, I did check it out, and the entire process seems relatively easy and very simple, with only a few clicks. So, given how many people are suffering from credit card debt, how many people are struggling financially, the delays with the stimulus checks being dispersed, and everything else going on, people would be smarter to take the offer, have extra cash on hand as needed, and then come back to this afterwards once all of this begins to stabilize.

However, this would be in the perfect ideal fairytale land world where everyone pays off their credit card. Has agreed no one carries a balance. And after all of this is done, people just end up resuming their payments as normal. Which, as of right now, we’re not sure whether or not this is going to happen.

The concern is that people dig themselves into more debt by borrowing more money, as seen by the 25 percent of people who increased their credit card debt during the crisis. And then, when all of this is over, the unemployment rate still remains high, the stimulus runs out, the unemployment benefits expire, and banks are going to be left scrambling around when a portion of those people can't afford to pay them back.

This is especially true for the 40 percent of the people there who can't afford to make more than the minimum monthly payment, and that leads us to believe this is not going to be an easy hole to climb out of.

To help get ahead and combat this, banks have just recently begun lowering their customers' lines of credit out of nowhere, with no warning whatsoever. On Reddit, there is even a recent data point from someone who had their $7,500 credit card limit reduced all the way down to three hundred and fifty dollars.

But for a credit card company doing this, it makes sense. If people lose their job or begin using up their savings, then typically credit cards are next in line. And if people aren't able to get jobs to then pay off their credit cards, that could end up as a default on the credit card and a loss for the credit card company.

So, in a way, lenders are getting ahead of this by decreasing the lines of credit to people who could potentially be a higher risk, and that way they could begin to mitigate the risk in the event people charge up credit cards and then decide not to pay them back.

But depending on how you see this, not all of it is bad news. In the middle of everything, there is some light at the end of the tunnel. First, the total credit card debt actually fell this quarter from nine hundred and thirty billion dollars down to eight hundred and ninety billion dollars, meaning some people are actually going and paying off their credit cards.

However, no good news comes without some bad news, and the bad news is that overall credit card debt is always high in Quarter Four of every single year around the holidays, and then it's paid back after the new year.

So, this trend of people paying off their credit cards after the holidays is really nothing new, and if this trend continues by September of this year, we're gonna be in the same debt as we saw in Quarter Four of December last year. And then we just end up digging ourselves into more and more credit card debt.

Now, the second little bit of good news here, if you even want to call it that, is that even though the overall consumer debt increased to its highest level ever, surpassing the 2008 levels, the good news is that 70% of the consumer debt is made up of mortgage debt at a time when right now interest rates are at their record lows.

So I think it makes sense that people are borrowing more money right now when interest rates are at record low levels. That just ends up costing less in the long run. The third bit of information is that it's reported that overall credit card usage dropped to its lowest level in March since 1989.

Although, to be fair, that's during a time when credit card companies are decreasing their limits, pretty much everywhere is closed, and people are forced to stay inside and not spend their money and just save it instead. So, the way I see it, that kind of makes sense.

But even with all of that, that leads us to the question: What's gonna happen when the economy reopens? People eventually return back to work and afford to pay off their credit cards.

I think the truth is, seeing credit card forbearance skyrocket by ten thousand percent is not that surprising, given how simple of a process it is and that there’s pretty much no downside to declaring financial hardship and just having a temporary pause in your credit cards.

Although, the problem is if these debts go unpaid for too long, it could ruin people's credit scores. It could send their accounts into collections, and that, in turn, means that once credit card companies end up taking a huge loss, they're going to be less likely to lend money to other people in the future, which could end up restricting our economy's growth.

It just means that future loans are gonna be a lot more difficult to obtain, and your credit lines are gonna be a lot smaller, which therefore affects your credit card utilization, which therefore affects your credit score. We can even begin to see this happening now as lenders are tightening their standards, very similar to how we saw in 2008.

So really, at the end of the day, here's where we stand and here's what this means. First, having such a large number of people requesting financial hardship assistance on their credit card is not surprising. It's easy to do. Banks have made them extremely accessible, and for anyone who's unsure about their financial future, it makes sense to pause payments and focus on the essentials before eventually coming back to the debt.

Second, it's absolutely concerning that so many people have been faced with financial hardship, and inevitably, a portion of those people will be unable to pay off their credit cards once the pause period is over. I certainly expect default rates to climb for the time being, and a lot of this depends on how quickly our economy begins to stabilize once people return to work.

Third, I think the most likely outcome from this is that over the next few years, credit card companies are gonna become way more strict about who they give loans to. They're probably gonna give you less of a credit limit, and they might end up charging more interest if they determine their risk is higher with people not paying them back and defaulting.

Ultimately, when used properly, credit cards could be a great tool to leverage your money, build up your credit score, get cash back, and travel for free. And that's the reason I like and use them so much!

But anytime it's used for a cash advance, when you don't have money to pay it off in full—especially for things you don't need—it's a recipe for disaster. If you find yourself in a position where you're in credit card debt and you want to figure out how to pay it off as fast as possible, here's my recommendation:

1. Prioritize paying off your debts beyond anything else besides your essentials. This means if you have credit card debt, don't go and buy new clothing, don't go and order takeout from restaurants, and don't go and order a whole bunch of stuff from Amazon, even though that's real fine. Instead, every single dollar that you have that is not going towards something you absolutely need should be applied towards paying down the debt.

2. If you're paying an extraordinarily high interest rate that you know is going to take you a while to pay off, then consider transferring that balance to a 0% interest credit card. Only a few of these cards down below in the description might be helpful. But transferring your balance to a 0% interest credit card, even if you end up paying a 3% transfer fee, is 100% going to be worth it for the amount of money you'll save doing this. It will give you significantly more money that you could use to pay down the debt directly instead of going and wasting that money paying credit card interest.

3. If you have the ability to take on more work right now or work a side hustle, then do it! Having debt like this is very much like a ball and chain weighing you down. Having credit card debt means less money that you have left over to save and less money that you have left over to invest, and you have to pay it off at some point. So you may as well do it now! Taking out more hours, or taking on more work, or making any amount of money and applying it directly towards the debt is going to be 1,000% worth it in the future.

So even though yes, a significant portion of people have paused their credit card payments, and it's cause for concern, it's still too early to tell how this is gonna play out. Best case scenario is that everyone resumes their payments as normal after this, and they get a few months of free interest, and everything else goes fine.

The worst-case scenario, though, is that we end up seeing a wave of defaults, people's credit gets ruined, credit card companies restrict who they lend money to, and that sends us into a downward spiral.

Now, in terms of what I think is gonna happen, it’s probably gonna be a mix of both. We'll end up seeing a portion of those people defaulting on their payments. Credit card companies are already lowering credit limits and being more strict about who they give money to.

As sad as it is to say, the people who end up needing the credit the most will have the most difficult time in the future rebuilding back up their credit score. So, the very least we could do is our best to stay ahead of this problem by always making sure our debts are paid off. And if you can't afford to do that, then at least make the minimum monthly payment.

That way, your credit card stays current. And of course, smashing the like button for the YouTube algorithm if you haven’t done that already.

So, with that said, you guys, thank you so much for watching, and I really appreciate it! As always, if you have not already subscribed, feel free to destroy the subscribe button and the notification bell.

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And lastly, if you guys want two free stocks, use the link down below in the description, and Webull is gonna be getting you two free stocks when you deposit a hundred dollars on the platform, with one of those stocks potentially valued up to $1400. So if you want two free stocks, use that link down below. Let me know which two free stocks you get!

Thank you so much for watching, and until next time!