The average credit card debt per household carrying card balances in the USA exceeds $15,000. Credit card companies are delighted because they make their money from charging a high rate of interest on that debt at the end of each month. Where would they be if everyone paid off their balances in full each month and used their credit cards purely out of convenience? The probable answer is that they would be out of business unless they revised their terms of trading.
The question arises as to why the situation has become this bad especially after the harsh lesson that the recession taught of taking out too much credit, even though that was on real estate in that instance. At least in real estate there is the chance of profit in normal circumstances. When it comes to card debt there is little except suffering other than anything bought to create the debt.
A recent analysis of data by NerdWallet involving the responses of 2,000 Americans sought to find out what ordinary people were thinking about finance. The facts are that over the last decade or so income has gone up by 25% but spending by twice that figure in some areas, notably health though even food and drink expenditure was well ahead of that income growth figure. Overall the percentage difference was just a few points but those few points are significant.
Few seemed to have understood how much interest they were paying simply for the convenience of having a credit card and using it for things they generally could not currently afford. They each need to start asking themselves whether they really need to spend on a particular item immediately. At time people are withdrawing cash on their card to actually subsidize their lifestyle; they are living beyond their means and need to economise is the obvious observation.
The Case for a Budget
A budget, a plan whatever you want to call it is the only way to get out of trouble. Too few seem to be prepared to do that and in those cases there will be future consequences that are likely to be unpleasant. The first thing to do is to forget about using your credit card or cards and think of a way to pay off the debt. The best way is with a personal loan that is much cheaper in terms of interest rate applied than the rates used by credit card companies. There is no need to close credit card accounts; that can actually harm your credit score because you will be lowering the amount of credit available to you. What you must never again do is use up that credit because you then will rarely have a second chance.
“Debt on a credit card is wasteful; simple as that. Those who ignore the advice about clearing their credit card balances are storing up problems for the future.”
The law requires that credit agencies have to provide you a free copy of your credit history, and hence score. You should get a copy regularly and make sure there are no inaccuracies. You will still be able to obtain credit with a poor credit score but it will cost you more; a higher interest rate by a point or two. It makes sense to improve your score wherever you can and that means not defaulting on any bill.
Your budget needs to pose several questions and provide the necessary answers:
- Do I need the present level of monthly expenditure and if not where are the savings? They make be ways to reduce regular bills on such things as utility services, insurance and telephone network.
- Is there the realistic chance of a surplus and if so how should that money be used? It is certainly not a reason for more spending.
The Big Picture
It appears that many Americans are not aware of their true level of debt which includes things far beyond simply credit cards. Mortgages, auto loans and student loans are three common ones. Mortgages are often regarded as a positive form of debt because they should be helping you to improve your asset position because real estate should grow in value over the medium to long term. Even student debt is justifiable because a graduate has better prospects in the jobs market than those who have not been to college.
Often it appears that people are surprised by their card statements suggesting that they are not in control of their spending. Others don’t regard the balance as real debt because they are not called upon to pay more than a monthly minimum. As long as they can comply with that they appear to be happy. It is similar to a company that looks at its profit and loss account and feels relatively happy, ignoring the liabilities on the balance sheet. Bad mistake!
One of the problems of debt is the embarrassment that it causes. Few would like to reveal how much they owe and certainly don’t want family and friends to know so it is a matter of self-help. The last thing you should do if you are in financial trouble is ignore it hence the advice on clearing credit card debt with a personal loan and following a budget.
It is a lesson that has yet to be learnt right across the country. The chances of people being able to enjoy a comfortable future, and certainly a happy retirement, are blighted by the debt levels on credit cards alone. Things need to change but whether they will is open to question. There are not enough positive signs to suggest they will but that is no excuse for you not to act yourself.
James Hendrickson is an internet entrepreneur, blogging junky, hunter and personal finance geek. When he’s not lurking in coffee shops in Portland, Oregon, you’ll find him in the Pacific Northwest’s great outdoors. James has a masters degree in Sociology from the University of Maryland at College Park and a Bachelors degree on Sociology from Earlham College. He loves individual stocks, bonds and precious metals.
