How consumers are using credit

Lisa Weinberger
March 8, 2018
grocery store, how consumers are using credit

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You may think that keeping up with the Joneses is the reason Americans are using credit and racking up record credit card debt. But, you’d be wrong. Turns out that needful items like food, medical expenses and housing are literally breaking the bank and causing people to turn to credit cards to make ends meet.

The average U.S. house carrying credit card debt has a balance of $15,654, according to a recent study by NerdWallet.  Altogether, by the end of this year, total credit card debt is expected to surpass the amount Americans owed in December 2007, at the start of the Great Recession.

While wages have increased slightly, they’re not keeping up with inflation. According to the Bureau of Labor Statistics, health care costs have increased 34% over the past decade, while income has only grown 20%. To keep up with bills, a whopping 27 million adults are putting medical expenses on a credit card. Food (22%) and housing (20%) round out the top reasons people they are in credit card debt.

Consumer confidence and using credit

It’s no coincidence that credit card debt is rising. With an expanding economy and consumer confidence on the rise, credit card companies and banks have made a big push to increase the borrowing power of Americans.

Credit card companies extended more than $4 trillion in credit lines as of mid-2017, according to the Consumer Financial Protection Bureau (CFPB). And the vast majority of new credit has been extended to borrowers with the highest credit scores and who likely have the money to pay off their credit card debt.

“Credit card companies have smartly tailored their reward packages with clearly branded cards to attract more affluent and confident consumers. But for the lower tier of earners, credit cards are still relatively easy to get, and this can be a ready source of credit that can make weekly survival easier, even if the long-term debt might be the result,” says Neal Roese, Ph.D., Professor of marketing at Kellogg School of Management, Northwestern University.

National credit card debt seems to indicate that even people with good credit scores and solid incomes are still struggling. Some 29 million Americans currently carry credit card debt and almost half have been struggling to pay off their debt for at least two years. With the average credit card interest rate sitting at 18.75%, the average household spends more than $1,200 a year on interest alone.

Using credit to pay for every day expenses, coupled with high interest rates,  is a slippery slope for many consumers no matter how confident and strong the economy. And the cost of debt is bound to go up if the Federal Reserve makes its anticipated rate increase.

Build emergency savings and pay down debt

One of the main reasons people get into credit card debt is because they lack emergency savings. When faced with big expenses and no savings, their only recourse is to turn to credit cards. Building your savings can help prevent unplanned charges on your credit cards and avoiding the vicious debt cycle altogether. Consider building an emergency fund equivalent to six months of take-home pay.

Building your savings in conjunction with paying down credit card debt is also important as it helps consumers avoid getting socked with high interest rates, which can push debt levels higher.

Professor Roese says it helps always to see the big picture, so keep a continually updated list of debts along with the total debt. “With the big picture in mind, consumers should set smaller, easily reached goals rather than big goals. For example, if you have several credit cards with debt, set the goal of paying off the smallest balance as soon as possible. This is because most people feel invigorated by accomplishing a goal, and it makes them more likely to continue in the face of bigger goals.”

Roese is referring to the snowball and the avalanche method where you either attack your card with the highest interest rate or the one with the smallest balance. The method you choose should be based on the one that motivates you the most. Whether you choose to pay off your debt with an avalanche payment or a snowball payment, the goal is to be debt free.

Personal finance experts also recommend borrowers with a hefty balance shop around for low or 0% interest balance transfer offers. Look for fees of 3% or less, and terms of 18 months or more.

Credit cards can be a very helpful financial tool when used wisely. It’s important that you use credit the right way to build and maintain a good credit score so that when you need to borrow, you’ll pay lower rates and save money in the long run.

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