What is the Average Household Credit Card Debt?

When it comes to credit card debt, especially with the passing of the CARD Act, there have been a lot of statistics flying around. I wanted to find a authoritative source, in this case the Federal Reserve, and see what the real numbers are.

One of the tricky things about averages is that it’s hard to make an apples to apples comparison. If you’re 25 and have $5,000 in credit card debt, is that good or bad? It’s certainly worse than having no credit card debt, but what if you’re responsible for providing for a family? A single person with $5,000 in debt is “worse” than a family with $5,000 in debt, all in one person’s name, right? It’s questions like these that make the whole “average credit card debt” question, and others like it, so tricky.

Despite these difficulties, it’s still valuable to understand what the average is as well as what the various trends are. If nothing else, it’s fun too right? 🙂

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Fed Says Recession “Likely” Over, Experts Don’t Believe It

Grays Papaya Recession SpecialOn Wednesday, the Federal Reserve will conclude its two day FOMC meeting and announce what they plan to do with the federal interest rate. Most experts expect the rate to stay at the 0% to 0.25% range the Fed set several months ago. With unemployment near or above double digits in some areas, it would be extremely difficult for the Fed to justify a rate increase at this point.

Last week, Jim asked if you thought the recession was over. In the post, he highlighted Ben Bernanke’s comments about how we were “very likely” seeing the end of the Recession but it doesn’t appear that experts believe him!

In general, the Federal Reserve lowers the target rate when it wants to boost the economy. Lower rates mean businesses can borrow money cheaper. It also means banks offer lower rates on deposit accounts, like CDs and savings accounts. The lower they go, the less incentive we have to save – so we boost the economy be spending more. The 0% – 0.25% target range is about as low as it can go.

We need to wait until Wednesday to see what the Fed announces but experts believe rates won’t increase until next year. If you were hoping for a frothy return to economic prosperity… you might have to wait until next year to pop the bubbly.

Fed not acting like there’s a recovery [CNN Money]

 Your Take 

Your Take: Is The Recession Over?

Recession BusterEarlier this week, Ben Bernanke, Chairman of the Federal Reserve, said the recession was “very likely over” but that the unemployment rate would likely still go up. There’s a lot of talk about a “jobless” recovery, that is a recovery in which new jobs aren’t created, with the unemployment rate not falling back to the normal 5% for at least another four years. Bernanke specifically said that the recession was likely over from a technical perspective, which is to say that we’ll probably still feel like a recession even if we don’t have two consecutive quarters of negative GDP growth.

So I wanted to know from you – do you think the recession is over? It’s one thing to look at “statistics” and declare victory, it’s another to look people in the eye and tell them that the recession is over.

Personally, I think that you can throw technical out the window because regular people don’t really care. Until people stop being afraid they’ll lose their jobs because of the economy, the recession isn’t going to be over. There have been a lot of positive things about this recession – Americans are repaying debt and saving more, frugality has made a resurgence, and there’s been a greater emphasis on emergency funds.

So… is the recession over?

(Photo: arvindgrover)

 Personal Finance 

Average Net Worth of an American Family

Do you know what the average net worth is in the United States?

Every three years the Federal Reserve Board does a survey of consumer finances, which looks at a wealth of financial information, including income and net worth. They even have statistics of the percentage of people who use the Internet to find financial data broken down by the age of the head of household (did you know that in 2007, 16.5% of families with the head of household above 75 years of age used the internet?)

Well, that’s where I turned to find out the average net worth of an American family.

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New Regulation on Credit Card Unfair Practices Approved

This week, the Federal Reserve, the Office of Thrift Supervision, and the National Credit Union Administration, after receiving a bazillion comments (really 65k+) on Regulation AA (Unfair or Deception Acts or Practices, by financial institutions in connection with consumer credit card accounts and overdraft services for deposit accounts), approved changes that make credit cards more friendly to consumers. While it will be until July 1st, 2010 before the regulations take effect, here’s what will change.

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Comment on Proposed Changes to Regulation AA: Unfair or Deceptive Acts or Practices

Regulation AA: Credit Card ProposalsI’m a huge fan of credit cards and I’ve never been in credit card debt before. I’ve been fortunate enough to learn the dangers of easy credit and was never seduced by its siren song, or her underhanded tactics like double cycle billing. The latest saga involving credit cards is debate in Washington over the proposed consumer protection rules offered by the Federal Reserve Board under an update to Regulation AA (Federal Trade Commission Act) — Unfair or Deceptive Acts or Practices.

Would you like to contribute? Here’s the press release discussing the proposals, simply scroll down to Proposals for Comment and click on Submit comment underneath Regulation AA.

My thoughts:

Freezing Interest Rates

One of the proposals is prohibiting banks from increase rates on pre-existing credit card balances. At first glance, this makes total sense. When you sign on the dotted line for a mortgage, you are aware of how the interest rate will behave. On a 30-year fixed mortgage, it will never change. On a 5/1 adjustable rate mortgage, it will be set for five years, then change every year after that. While in the last few years this was abused, in principle is makes total sense. You know what you’re getting into. With credit cards, the rate is always variable and can always change. However, you accept that when you apply for and begin using the card.

That being said, I do think that credit cards should be adjusted to reflect the way it’s actually being used and that requires that rates be locked at the time it is being spent. The consequence of this is that all interest rates will rise because it reflects a greater risk assumed by the credit card company and credit cards will be harder to get. You provide no proof of income when you apply for a credit card, perhaps that will change.

Application of Payments

Consumers taking advantage of 0% for life offers recognize this little line item, credit card companies apply payments to the lowest interest rate first. For example, recent 0% for life offers usually require two or three purchases a billing cycle. The cost of those purchases is at the prevailing rate, usually much much higher, and payments are applied to the 0% offer.

Consumers should be allowed to pay down whatever balance they want, not be forced to pay the lower offer. In all cases, this will be the amounts with the highest interest rate. Don’t listen to Dave Ramsey, you want to pay the higher interest rates first, not the ones with the smallest balances.

Double Cycle Billing

This is tactic is just underhanded. If you’re an impartial observer, you can understand variable interest rates because credit card companies put it plainly in their agreements. Double cycle billing? Give me a break. Double cycle billing is when they take the average of your two previous bills and charge interest on that. I don’t even know why this was even acceptable in the first place.


Obviously, the banks don’t like it:

“We are deeply concerned that these rules will result in less competition, higher consumer prices, fewer consumer choices and reduced consumer access to credit cards,” President and CEO Edward Yingling [of the American Bankers Association] said in a statement.

I don’t agree that they go to far, I think they’re great proposals, but I do agree that it will result in less competition, higher prices, fewer choices, and reduced access but that’s exactly what we need. We don’t need credit card offers piling up in our mailboxes, we don’t need the average family credit debt to be around $10k, and we honestly will survive if there are fewer credit card companies.

Weigh in on proposed credit card laws [CNN Money]

(Photo: thetruthabout)


Predicting Federal Reserve Rate Changes

Do you ever read the news or watch television and wonder what those speakers mean when they say “the market predicts the Fed will [increase rates/cut rates/do nothing]?” I have.

What they are referring to is the federal funds futures market where traders buy and sell options contracts linked to the federal funds rate. Unlike other options, where an actual asset could be delivered (an oil futures contract is actually a contract to buy or sell oil at a future date), the federal funds futures contract is a little different. Rather than butcher the definition, according to the Federal Reserve Bank of Cleveland:

A fed funds futures contract is an interest rate futures; i.e. a futures contract whose value is based on a fixed-income security or interest rate. The underlying interest rate for the fed funds futures contract is the average daily effective federal funds rate for the delivery month. The final settlement price for a contract is 100 minus this average rate.

When the market “predicts” the next Fed action, it’s really what the wisdom of the masses (the fed futures trading masses) believe, based on their trading actions, what the future federal funds rate will be in the delivery month of the option.

Where can you find this information easily? The Federal Reserve Bank of Cleveland’s Fed Funds Rate Predictions page! It’s updated daily and has tons of information (check out the excel spreadsheet you can download).

How can you use this? Outside of fun trivia, one way to take advantage of this is to avoid buying long term CDs if the prediction says the rates will go up and to buy CDs when the rates are going down. While the predictive ability spans only a few meetings in the future, it can give you a better idea if you’re deciding what to do. Of course, since everything is measured in probabilities, anything can happen.

 Banking, Personal Finance 

Remember Certificates of Deposit During Fed Rate Cuts

If you think interest rates are falling, put some of your savings into a CD. Since last August (2007), the Federal Reserve, haunted by the spectre of a slowing economy, had been hacking and slashing the Federal Funds and Discount rates. During that run, and until just recently, the prevailing attitude on Wall Street was that the Fed was going to continue cutting the rate until the threat of future inflation balanced out the threat of a recession. With this last twenty five basis point cut at the end of April, the prevailing attitude changed. Analysts now believe the Fed will stand pat and potentially even raise rates in the future.

During those rate cuts, all of the high interest online banks dropped their savings account interest rates dramatically. Since January of this year, the interest rate on E*Trade’s online savings account fell from 4.95% to 3.01% (only to increase, just recently, to 3.15%). ING Direct account holders saw their rates fall from 4.10% to their current rate of 3.00%. If you were able to purchase a CD at the prevailing higher yield online savings account rates for even a year, you’d be sitting pretty on those funds right now and that’s why CDs become popular during a falling interest rate environment.

This is where you say: “Jim, I’m not an idiot, I know that if the rates are going lower then I want to lock in good rates.” Yes, you are not an idiot but the point is I didn’t lock in any funds in CDs, except for my laddered emergency fund, because I didn’t recognize that I should have (or at least should have considered it). It wasn’t an error of judgment but one of ignorance.

Everyone knew rates were going to be cut but not everyone realized they should’ve considered putting a little bit away in certificates of deposit. (I can confidently say that because I know I didn’t) So, the next time you think rates are going to stagnate or fall, lock a little away in CDs.

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