Time To Pay Up


I hope everyone had a great weekend! I am in Colorado this week on a well-deserved (depending on who you ask) vacation. Since I’m busy enjoying myself, I decided to combine the two emails this week into one. So today we have a little bit of news, a little bit of business, and a cool story (a really cool story).


And I won’t bug you on Friday. Also, Friday is St. Patrick’s Day, so who would have read it anyway, right?

Are we in trouble?


Credit card debt just reached a new all time high, $986 billion in Q4 of 2022, which is a $130 billion increase since Q4 of 2021. The average balance on the individual level is $5,805 with a near 20% interest rate.

That means that if the average person made minimum payments toward their credit card debt, it would take them over 17 years to pay off. And that 20% would cost them $8,213 in interest.

To make things even more bleak, that’s just credit card debt. That number doesn’t include car loans, mortgages, or personal loans.

So that all sucks.

When you look at the bigger picture, credit card debt has typically gone down during economic downturns. What do I mean by that? Well right after the collapse in 2008 you see a dip, and then again right after covid.

And this makes sense, when the times are bad (job, market, and income insecurity) you see people tighten up their budgets and borrowing less. Whereas, when the market is good (hot job market, high stock market returns, etc.) people become slightly looser with their money or willing to take some more risks.

But we’re at an interesting spot.

For one, the dip after covid was a whole lot shorter than the one after the recession, which is probably do to inflation and the rising prices of everyday items.

And two, consumers are being rapidly priced out of their lifestyles, leading them to borrow more to maintain the things they’ve always had.

And to cap it all off, as this number ($986 billion) increases, so does the number of subprime borrowers. Similarly, to how the wealthiest 10% own 89% of the stock market and 70% of the total US wealth, the bottom 10% are responsible for a disproportionate amount of the credit card debt.

I don’t even really know how to dissect this beyond the macro level, but it seems like something’s gotta give at some point?

The flip side


But enough with the bad news. Much like the borrowers who hold most of that debt, “let’s just ignore it for now” because that wasn’t the goal of today’s email.

Everyone’s heard of flipping houses, well it turns out there’s a similar process for debt. If I’ve learned one thing in life, it’s that there’s arbitrage in everything.

Here’s how it works

Don’t make a payment, make a living?


Let’s say that you have $10,000 of credit card debt with American Express. What American Express will do is sell that debt to a debt collector for pennies on the dollar (in this case let’s say they sell it $3,000).


Well, a lot of debt just never gets paid back anyways, so credit card companies will often “take what they can get” and sell the debt for $3,000 instead of going through the headache of reaching out to borrowers trying to collect and getting like $4,000. It’s just not worth the time and resources for them.

These debt collectors who bought the debt for $3,000, will then call the individual (us in this case) and say something like “Hey look, we’re nice and we’ll cut you a deal. We’ll knock off $6,000 if you can pay us $4,000?”

And that is how flipping debt works. American Express makes $3,000 and skips the headache, the debt collector makes $1,000, and we only pay $4,000 compared to the original $10,000.


Why doesn’t everyone flip debt?

I know what you’re thinking. Can I just become a debt collector, buy my own debt from American Express, and then “cut myself a deal” and pay off everything for $0? The short answer is no (trust me, I looked into it).

The ideal case in the debt flipping picture is intriguing, but it hardly ever works out that way. Most of the time debt collectors are required to purchase thousands of accounts, without being able to pick and choose who’s debt their buying.

And even if the collection agency comes to individuals with a “deal” they only get paid on average %16 of the time.

Link this with the headache of hiring people to sit and literally make phone calls all day, yea no thanks.

But some people still manage to make it work.



One success story

This is David Tepper. David Tepper rocks, and here’s why:

David Tepper was a relatively well-known analyst on Wall Street. After working his way up at Goldman Sachs, he was passed up for a promotion to become a partner twice, so he decided to quit.

He started his own fund, Appaloosa Management, which specialized in three things: emerging Russian markets after the Soviet collapse (again, go read Red Notice to learn more about the early Russian markets), the early internet, and distressed debt.

Yep, that’s right, Tepper was a glorified debt flipper with big pockets. Instead of buying petty consumer debt (the small accounts), he was able to target and buy the big corporate debt accounts.

He purchased the debt of huge bankruptcies like Enron and WorldCom. After the bankruptcies, the demand for this debt skyrocketed, so he sold it which led his fund to go up 148%.

The rest is history, he became a billionaire relatively shortly afterwards and bought the Carolina Panthers.

Oh, and that boss who passed him up for the promotion? He bought his house in the Hamptons, bulldozed it, and built one twice the size for kicks and gigs.

Grudges rule.


Who’s going to foot the bill?

Like I mentioned earlier, I don’t really know how to dissect the growing consumer debt on a micro level. But with my limited knowledge, I could see it going one of a few ways:

  • Maybe this is just like the government debt ceiling I wrote about earlier where the number will continue to increase, but is viewed a “normal” and it doesn’t matter too much because of the relative successful US economy compared to global markets? Maybe the increasing credit card debt will lead to deflation of the dollar or spending power? Not sure.
  • Maybe this bubble will burst at some point? It sounds eerily similar to the subprime mortgage crisis, but on the consumer side. I don’t really see this option as very likely because I could see some sort of government intervention or bailout.
  • Maybe the credit card debt will continue to grow, trapping people in the lower class and widening the gap between the upper and lower class while thinning the middle?
  • Maybe there will be some sort of awakening, where everyone gets a handle on their debt and this number trends to 0?

I’d say it’ll probably skew towards the first option, where people will make a big deal out of it a few days a year. I mean that’s kinda how the US debt has been for the past decade or so now.

Regardless the case, one thing is for sure, as credit card debt continues to increase, so does the market for debt collection agencies. Either the existing agencies will grow or new agencies will gain market share. They’re not that hard to start and if you can manage the headache can lead to a lot of success.

‘Til Friday, then on Friday let’s have ourselves a weekend.

from, matt

%d bloggers like this: