Credit Cards are Loans. And Debt on Them is Increasing

By the end of 2017, Barbadians had amassed $347 million in credit card debt. This is according to the 2017 Financial Stability Report, a joint publication by the Central Bank of Barbados and the Financial Services Commission (FSC). The report also revealed that the number of credit cards in Barbados jumped by more than 40 percent between 2015 and 2017, from just under 91,000 to almost 129,000.

Of that $347 million in credit card debt, 93 percent of it was owed by individuals and households. While this might seem surprising, the report explains why this is the case:

"Credit card debt is unsecured credit which makes it more feasible for households with short-term financing needs and without available collateral to acquire credit."

In other words, while many of us think of credit cards in the same way that we think of cash, cheques, or debit cards – as simply another option to pay for the things we buy – credit cards are in fact mini loans that don’t require collateral. 

When we fully repay our credit card bills on or before the due date, there isn’t much difference between them and other payment methods, but when we don’t repay the entire loan – our credit card bill – on time, that’s when we begin to accumulate interest. And because credit cards are unsecured loans, the interest rate on them is much higher than the one we would pay on a vehicle loan or a mortgage.

Those high interest rates mean that although credit card debt represents only 5.8 percent of total household debt, which was $6 billion in 2017, it generates 13 percent of the interest income commercial banks earn on all the loans they issue.

Another thing worth noting is that between 2000 and 2017, credit card debt grew at a faster rate than overall debt has – at an average of 8 percent each year, as compared to 5 percent for all types of debt combined.

Household debt is carefully monitored by the Central Bank and the FSC, who say that there is a “correlation between credit card debt and economic activity and the potential implications for general household indebtedness.” These two regulatory agencies have committed to keep track of the level of credit card debt in Barbados, but we as individuals and members of households also need to be mindful to manage our credit card loans just as we do our other debt to minimise potential financial difficulties.