Credit card debt in America has been on the rise over the last several years. In fact, current household debt is nearing the peak number of the financial crisis of 2008. According to the Federal Reserve Bank of New York, credit card debt far surpasses other types of debt in number of accounts, and that number is steadily ticking upward (see chart). With the economy finally starting to show signs of life after being stagnant for many years, will Americans continue to accumulate credit card debt at such a fast rate?
The answer is unknown, but all indicators point to a continued upward trend. Americans are, as a whole, an undisciplined group. Living above one’s means and failing to save are hallmarks of those who carry a large amount of credit card debt.
Reasons for rising credit card debt
Often, there are other reasons, besides irresponsibility, why people accumulate credit card debt. Some of these circumstances may be out of their control. Let’s look at some of the reasons Americans stack up undesirable amounts of credit card debt and look at some possible solutions.
Cost of living outpacing income
For the better part of the last decade, income growth has been very sluggish, if not flat, in most parts of the country. When income growth is stagnant, consumers cannot keep up with the rising cost of living and have to rely on other ways to make ends meet. Usually, this means utilizing credit cards just to meet everyday expenses. In addition, compounding the problem further, families are unable to save money for emergencies, much less for vacations and special events.
Additionally, child care expenses for working parents can often offset take-home pay nearly entirely, causing the income-to-expense ratio to degrade even further. Working parents who don’t have family to rely on to help fill the childcare gap find themselves in an impossible situation where picking up extra income through an extra job or working longer hours does not do much to increase income.
Lenders easing credit
During the financial crisis of 2008, lenders tightened their credit extension policies considerably. This was not isolated to just mortgages but extended also to student loans, auto loans, and credit cards. For quite some time, credit was difficult to obtain for consumers, and this drove debt down in America. However, over the past few years, as credit scores have improved for those hit hard during the financial crisis, banks have started to loosen their purse strings and credit is getting easier to obtain.
After years of financial austerity and stagnation among consumers, many needed bigger housing or needed to replace their cars and furnishings. This, along with credit easing, created an avalanche of new credit card accounts and consumer loans. Years of low interest rates have only fueled the fire. Now that rates are going up, consumers may find themselves increasingly pinched by higher payments.
Rising expenses
As the economy improves, the cost of big-ticket items and the interest rates consumers pay to finance them will go up. This includes autos, household furnishings, student loans, and other necessities. In addition, the cost of housing will increase across the board, whether you are renting an apartment or buying a house. Add that to the normal cost of living items such as food and entertainment and income growth may be eclipsed once again.
Consumers may find themselves in housing they can no longer afford but unable to foot the cost of a move. Alternatively, they may have a student loan they can no longer make the payments on, as many of these loans have variable rates. If consumers face high credit card balances, even the minimum payments will rise as interest rates go up. This makes it increasingly difficult to stay current. With nowhere else to turn, many will turn to additional credit cards to get by.
Divorce
While the belief held by many is that over 50% of all marriages will fail, that is not necessarily true. In fact, according to this article put out by Time magazine, divorce rates hit nearly a 40-year low at the end of 2016. The rate of marriages has also declined, but only because many are waiting until later to get married. Those who marry later tend to stay married as opposed to those who get married before the age of 25.
Economic factors play a key role in the divorce rate, as lower income couples tend to divorce more often than their higher income counterparts do. In addition, those with a college degree tend to stay married longer than less educated couples do.
So, even though the divorce rate has declined, the financial impact of divorce has not gotten any less severe. Many times, couples are already in financial trouble to begin with, and divorce only makes things worse. Moreover, single parents struggling to make ends meet on one income will sometimes have no choice than to turn to credit cards to get by.
Poor money management
Many Americans struggle with poor money management skills. Most high schools and colleges teach little to no financial knowledge or skills to their students. Most graduates go out into the world with no ability to manage money at all. Compound this with the staggering student loan debt many young people are carrying, and a stagnant job market, and the problem becomes clear.
Credit cards are an accessible method of bridging the gap between income and expenses. Without adequate income, many people are dependent on credit cards to get by. Better solutions involve getting a second job to increase income and making a concerted effort to decrease expenses.
Many online resources exist to help those with poor money management skills learn to create a budget and stick to it. Websites such as Mint offer budgeting instruction, monetary advice, and many other tools to help.
Unemployment or underemployment
When someone loses a job, the financial result can be devastating, especially if that person was the head of a one-income family. Depending on the circumstances, income may stop immediately, leaving a family scrambling to pay for housing and food. If there is help available, such as unemployment compensation, it is usually far less than what is necessary to make ends meet. At this point, families have no choice but to depend on credit cards.
When times are tough, any job is better than no job at all. If a family is desperate for income, the breadwinner may take a job that pays far less than the one lost. Americans accepting a lesser job, or being underemployed, has been a very prevalent circumstance in the last few years, as the job market has remained stagnant. While there is sometimes no choice, underemployment can lead to a mountain of credit card debt as consumers use them to make up the income shortfall.
Gambling problems and other addictions
When addiction strikes a family, it can be devastating in many ways. Aside from the emotional strain and difficulty it can cause, especially in a marriage, it can have serious financial implications. Those suffering from drug and alcohol addiction cannot prioritize things ahead of their needs, meaning even rent or food money is fair game when it comes to fulfilling their addiction.
Gambling addictions can be worse. The financial impact of someone with an addiction to gambling can be profoundly devastating, as the ability to lose a lot of money in a short period is possible. Today, gamblers can place bets over the Internet using a credit card. If the problem is serious enough, sizable sums of debt can accumulate in a very short period. Often, it will only stop when the addicted individual runs out of credit and the family or individual is in financial ruin.
Those with gambling and other addictions should seek help from one of the many organizations that exist. Families and loved ones can also seek counseling to cope with the addicted person’s behavior and its impact on everyday life.
Medical expenses
An unexpected, serious illness can wreak havoc on a family’s finances. The cost of good health care, even with insurance, is very expensive. Large deductibles, co-pays, and high out-of-pocket caps can set the stage for extreme financial difficulty. This is not including the impact on income of not being able to work or time spent caring for a loved one.
Someone faced with rising medical debt will often turn to credit cards to pay medical bills or to get by when income suffers. Paying for prescriptions is necessary, and with drug costs spiraling upward, sometimes using credits cards to pay for them is the only answer.
Consumers who have high medical bills, especially with hospitals, should do their best to negotiate their balance down and get on a payment plan they can handle. Hospitals and providers are generally willing to work with those struggling with large medical bills.
Insufficient savings
One of the biggest reasons consumers fall into credit card debt is that they have little to no savings to fall back on. Therefore, if they lose their job or even just have a reduction in available hours, they are unable to make ends meet. Throw in the occasional, unexpected purchase, such as a new refrigerator or car repair, and they are relying on credit cards to pay the bills or foot the expense.
Consumers should budget to contribute something to savings every month. If they cannot afford to save on a monthly basis, they should look to reduce expenses or bring in additional income to fund their savings account. Sometimes, getting rid of unused items through a garage sale or online auction can provide a good jumpstart for a savings account.
Solutions for credit card debt
Consumers who find themselves in credit card debt should be actively looking for ways to reduce it and eventually pay it off entirely. There are a number of ways to approach paying off credit card debt and, while some are faster and easier than others are, each has its own set of benefits and downsides.
Debt consolidation
Rolling all your debts into one loan can streamline your payments and sometimes lower your monthly payments. However, depending on the type of debt consolidation loan you choose, you may find yourself paying off your balances for a much longer period. Home equity loans and home refinance with cash out, for example, may extend your payment of your credit card debt over many years. Consumers should also be wary of rolling their credit card debt into their home mortgage. Your home secures your mortgage; meaning, if you don’t make the payments, you could lose your home to foreclosure.
DIY payoff strategies
There are a couple of ways to pay off your credit card debt on your own. Financial guru Dave Ramsey outlines a plan on his website as part of his baby steps program that he calls the “snowball plan.” It involves attacking your smallest debt first, and then working your way through your other credit cards until you have paid them all off.
Additionally, you can pay your credit card debt off in 3 years by simply following the guidelines on your credit card statement. Your statement will have a box that shows the payments necessary to pay off your card in 3 years. By simply paying this amount each month, you can be credit card debt free in 36 months. Both of these methods will work if you stay dedicated.
Debt relief
When consumers find they are unable to make their own way out of credit card debt and are unable to continue paying their bills, something has to give. Sometimes, a debt relief company such as National Debt Relief can help consumers settle their debt with credit card companies. This involves closing credit card accounts and directing payments to an escrow account in the consumer’s name. Once you reach a predetermined amount of money, the debt relief company will begin negotiating with your lenders.
Finding oneself at a crushing level of debt is a tough realization. Aside from the obvious stress involved, many are embarrassed and too ashamed to seek help. Reaching out and taking that first step is often the hardest part. Get a plan together today to start working on resolving your credit card debt. Don’t wait until you are drowning in debt to take action.