Opinion: One Surprise Bill Could Tip Millions Over The Edge

“Firing on all cylinders.” That’s what White House economic advisor Kevin Hassett said recently about the American consumer, since “credit card spending is through the roof.”

Since apparently it needs to be said: Rampant credit card spending is not, in fact, a sign of consumer health. Instead, it is a blinking red warning light.

Here’s why: A big percentage of the population is living very close to the financial edge. And often, it’s a surprise expense that gives people a push into the abyss.

In fact among all credit card debtors, 41% say the reason for their debt was an unexpected emergency bill — like medical charges, car trouble, or home repairs, according to a recent Bankrate survey.

Very often, that debt doesn’t get paid off right away. It becomes revolving debt, carried over from month to month at APRs of more than 20%, trapping borrowers in a cycle they can’t get out of. 

No wonder 22% of debtors in the aforementioned survey said they worry they’ll never be able to pay it off. That’s pretty bleak stuff — maybe not for the industry, which is being rewarded handsomely for all these expenses being put on credit.

But for broader economic stability, it’s not healthy for such a big chunk of society to be one bill away from financial devastation because surprises happen to every one of us — a family illness, a pipe leak, an engine breakdown. 

Those expenses aren’t due to wasteful spending or moral failing. They’re just life. And we need to be able to deal with them without the Sword of Damocles hanging over our heads.

A Way Forward: Personal and Political

The good news is that we are not powerless here. We can pursue strategies — some are individual, and some are societal — to prevent so many people from tumbling into this endless debt cycle.

First, is recognizing the supreme importance of an emergency fund: It’s not a nice-to-have luxury, it’s a must-have, especially in the current economic moment. When those surprise expenses come, you have a cash buffer to protect your other assets and avoid the prospect of rolling everything forward on plastic.

Most financial planners suggest having between three to six months worth of expenses in such a fund. But even if that takes time to assemble, having at least a portion of that will help you sleep better at night. 

Institutions also bear responsibility to engage in financial education on a mass scale with clients, and make emergency saving as seamless and attractive as possible.

Financial experts recommend creating an emergency fund that can cover at least three months of household expenses.

Employers, too, can play a part: One bright spot on the policy front, thanks to provisions in the Secure 2.0 Act, is that employees can now save in dedicated accounts at work, over and above their retirement fund.

The government could also strengthen the safety net under the most vulnerable consumers, so they wouldn’t have to turn to debt measures like payday lending or Buy Now Pay Later to cover sudden expenses.

It could also push back against aggressive lending practices, such as the 279.5% annual rate highlighted in a recent ProPublica article.

But to be honest, protecting the most economically vulnerable doesn’t seem to be an administration priority. Millions have been kicked off SNAP benefits that have been a traditional cushion, and the Consumer Financial Protection Bureau has essentially transformed from a tiger into a tabby cat.

Just How Much Can You Squeeze Borrowers?

The system is essentially working as intended, pushing borrowers as far as it can to produce huge revenue numbers, and casually assuming this won’t cause any deeper systemic risk. In booming economic times, with the arrow always pointing up, that might be true. 

But every bill comes due eventually. And so here we are, with credit card debt at a record $1.28 trillion, according to the most recent Household Debt and Credit Report. 

The debt situation is a bit like automated warning systems in newer cars, which start beeping when they foresee a crash developing. So, are we going to course-correct and try to reduce debt burdens, or are we going to just keep doing what we’ve been doing?

A trillion dollars is hard to wrap your mind around, so here’s a stat to bring it all down to a more personal level: According to the Federal Reserve, 37% of consumers couldn’t come up with $400 in cash to deal with the unexpected.

In other words, one surprise expense and monthly budgets are blown up. Borrowers are telling us this very plainly.

So right now, consumers — maxed out, many being laid off, weighed down by a cost of living they can’t keep up with — seem to be at the brink. 

And if they fall off that cliff, it’s not just them who will pay the price. The entire financial industry will, too.