The level of credit card debt in the USA is worrying to say the least. It is at its highest for years and remembering the misery of the years of recession it is quite surprising that people are apparently comfortable to carry such debt, especially when real estate values have lost some years of growth. Cards are convenient and when used properly also provide rewards to encourage loyalty but the level of interest charged on balances that remain outstanding at the month end questions how sensible consumers are with their use.
As the recession was coming to an end the Federal Reserve Bank of Boston suggested that over 70% of adults had at least one credit card. In 2014 figures show that the average American has 2.6 credit cards which is actually down from the pre-recession average. Almost a third have 5 cards or more. Even though the average number of cards has dropped that does not mean that debt has fallen as well. In the final quarter of 2015 the average card debt per household was creeping towards $8,000, the highest level since 2009 when the effects of recession had cut people’s access to other forms of credit.
If you read this and see your situation as being out of control or reaching that point, you need to give your position some thought. The first quarter of any year when tax refunds are available often paints a better picture, but then through the next three quarters debt tends to rise. Mid-year holidays and Christmas spending are just two of the reasons card debt rises in the third and fourth quarter. The overall total debt in the final quarter of 2015 incidentally was $52.4 billion. If there is any good news, it is that high as the interest rate charged is at least general interest rates remain low. Indeed, those keen to sort out their debt can get very competitive personal loans to pay off their card debt and merely pay back the installments for the full term of the loan.
If you are beginning to worry, then you need to curb your spending in order that you are not overspending. If you clear your card debt with a loan you cannot immediately begin to build up your debt once again. You should only spend when you can pay the full statement amount in full each month. That requires self-discipline and a budget that ensures your finances show a surplus each month, the larger the better.
You need a budget written down that shows all your financial activity. That means even your small dollar spending each day, because over a month that adds up. You can anticipate when your regular bills are going to arrive and therefore aim to get your cash flow in order so that you can meet them. Your budget needs to be under review constantly so it always reflects what is actually happening.
- Your credit score should be important to you. It is something that potential employers may even refer to if you are applying for a job. Your score reflects your history as well as the available credit you have and of course your existing debt.
- Covering your monthly expenses must be your aim as a minimum. Even if at this stage you have no emergency fund you cannot avoid financial problems if you are overspending. You should look to see if there are some obvious savings that you can make such as cheaper utilities or insurance. Those savings may help towards an emergency fund.
- If you need and want a loan then look at interest rates and apply accordingly.
Debt does not disappear if you ignore it. In some cases you can negotiate some relief; creditors may feel that the fact that you are prepared to talk means you are taking your finances seriously. The only time that a credit card can help your finances is if it is used sensibly. That means not spending on something you cannot afford even if it appears a bargain. By the time you have paid for it in full the interest that will have been applied is actually the true picture.
—Friends of FaM