Credit card debt has been steadily rising over the last few years. Today’s household debt has surpassed the previous highest level that occurred in the midst of the financial crisis of 2008. According to a recent report by the Federal Reserve Bank of New York, current credit card debt in America exceeds other types of household debt in total number of accounts, and this trend shows no sign of slowing down.
Now that the economy is beginning to come back to life after years of stagnation, lenders are once again opening their coffers and relaxing their lending practices. This means it will become easier for consumers to accumulate problem credit card debt. Many consumers will end up trying to consolidate that debt.
Why Americans Have so Much Credit Card Debt
There are many reasons why consumers accumulate credit card debt, from mismanagement of money to circumstances beyond our control. Either way, understanding the cause of the problem is the only way to address it.
Living Above One’s Means
Americans love their “things,” and many are not willing to wait to save the money to acquire them. Credit cards allow consumers to buy what they want, when they want it. Studies point to the fact that at least 70% of American consumers have one or more credit card.
A Lack of Savings
According to a recent article by CNBC, nearly 69% of American consumers have a savings account balance of less than $1,000. An estimated 34% of Americans don’t have any savings at all. This leaves most American consumers unprepared for even a small financial emergency. Depending on credit cards to get through one of life’s bigger emergencies could cripple a typical family’s finances.
Experts agree that without savings that equal a few months worth of expenses, consumers could face a serious financial crisis if the event of a job loss or unforeseen medical emergency.
Poor Money Management Skills
Most American consumers lack money management skills, as traditional schools lack this as part of their regular curriculum. Americans are on their own to figure out how to budget their expenses and income while trying to save for larger purchases, or for retirement. Because of this, many Americans depend on credit cards to fill in the gaps in their monthly budget.
Many spend more money than they bring in and rack up credit card debt, which, in a worst case, leads to insolvency. Only by increasing income or decreasing expenses can consumers break this cycle.
Income Growth Outpaced by the Cost of Living
Because the economy has remained stagnant for most of the last decade, income growth has been small or nonexistent. When this happens, consumers have a hard time keeping pace with the rising cost of living and become increasingly dependent on credit cards to make ends meet.
Loss of a Job
When an income earner loses his or her job, the sudden impact can cripple a family’s finances. This is especially true if the income earner is the sole provider for the family. If the job loss is immediate, there may be little to no assistance available, leaving a family in a desperate situation and struggling to pay for housing and food. Any assistance that might be available, such as unemployment compensation, is usually inadequate.
With a greatly reduced income, a family may have no other choice than to use credit cards just to get by. If possible, the earner may take a lower paying job in the meantime while looking for a better job. Regardless of the circumstances, the loss of job can lead to the accumulation of a large amount of crippling credit card debt.
When someone becomes ill or suffers an injury, the ripple effects can be financially devastating. Aside from the high cost of medical care, deductibles, prescriptions, and co-pays, someone who is seriously ill may not be able to continue to work.
With income significantly decreased and medical bills piling up, often, a family has no choice other than to turn to credit cards to make ends meet. The cost of medical care, even with insurance, can be astronomical, as is the cost of the income earner being out of work.
It’s a widely held belief that over 50% of all marriages will end in divorce, but the rate of divorce has been steadily declining over the past few years. According to a report in Time magazine, at the end of 2016, divorces reached a 40-year low. Many young people are choosing to get married later in life, which is lowering the divorce rate even further. Those who marry after the age of 25 have a higher success rate.
Money plays a key role in the success or failure of a marriage. Couples at the lower end of the economic scale divorce more often than those who are better off financially. Education levels play a role as well. Those with a college degree stay married more often than those without it.
With money playing such a large role in the marriage equation, it only makes sense that it also plays a large role in divorce. In fact, apart from children, money matters are often the biggest hurdle a couple faces when trying to reach a settlement. Splitting a household generally means establishing two new households, which results in a doubling of expenses, usually with no additional income. Many couples turn to credit cards to fill the gap, and they end up with a sizeable debt.
Are You in too Deep?
There are usually some very clear signs that you have gotten too deep into credit card debt. If you can identify with some of the circumstances below, it might be time to consider your debt consolidation options.
- Credit cards are at or near their limits
- You are only making the required minimum payments on your credit cards
- Your monthly income is not sufficient to meet all your obligations
- You are relying on your credit cards to pay for everyday expenses
- Your credit score has suffered because of your credit card use
- Your marriage is suffering because of your money problems
- You have an unexpected expense and are unable to pay for it
- Credit card companies are calling about missed payments
- You are feeling hopeless about resolving your credit card debt in a timely manner
Considering Credit Card Consolidation
Consumers with excessive credit card debt eventually come to a fork in the road where they need to tackle the issue. If they are proactive and avoid letting things get too far out of control, they may be able to consolidate their credit card debts into a single payment. Several types of credit card consolidation programs exist for consumers to consider.
Some credit card consolidation plans are secured loans, secured with some type of collateral that guarantees the loan. In most cases, the collateral is a piece of property, such as your home. If you fail to pay the loan back on time, the lender can foreclose on the property. The lender obviously doesn’t want to have to do that, mainly due to the legal cost, but it’s something debtors need to consider before agreeing to back a loan with a major asset.
Unsecured loans are those without property put up by the consumer as collateral. Talk to your potential lender about all your options.
A Refinance of Your Current Mortgage with Cash Out
Many consumers will look to refinance their current mortgage and take some cash out to pay off their credit card debts. Many may be able to lock in at a lower interest rate, depending on market conditions. Often, consumers end up with a mortgage payment of about the same amount but will no longer have the credit card debt.
While this can help with cash flow issues, consumers should consider a few important factors when refinancing their home and consolidating their credit card debt. Mortgage loans carry excessive closing costs that the consumer must pay upfront or add to the balance of the loan. This could mean losing a significant portion of the equity in your home.
It’s important to remember that when you roll your credit card debt into your mortgage, you now pay interest on that money for a very long time, up to 30 years. Additionally, you are moving your debt from an unsecured position to a position secured by your home. That’s a potentially risky proposition.
Home Equity Line of Credit (HELOC)
If you own a home and have some equity, meaning your mortgage on the property is for less than what the property is worth, you may be able to take a home equity line of credit to consolidate your credit card debt.
With a HELOC, the consumer can draw on the equity of the home, up to a certain amount, as needed. Most lenders do not have any restrictions on how consumers can use the money, so it is perfectly acceptable to use the loan proceeds to consolidate credit card debt.
Again, remember that rolling your credit card debt into the balance of your home mortgage could create a risky situation if you are ever in a position where you cannot pay back the loan.
Consumers need to be aware that if they do not change the way they spend money and manage finances, it is possible they just end up running up debt again. If that happens, they once again have high credit card debt but also now have a larger mortgage balance.
If you have good credit and a good relationship with a lender, you may be able to qualify for a personal loan. One caveat is that most lenders have a limit on how much they will lend on a personal loan. If you have a large amount of debt, this is probably not the ideal option for you. In addition, the loan terms on a personal loan are much shorter than on mortgages, so the reduction in total payments is not likely to be much.
Many consumers take these loans as a means to simplify the repayment process. The idea of making one payment to one lender is appealing to consumers who are currently making multiple payments per month.
What to Do if You Are in Over Your Head
Sometimes, a consumer waits too long to address his or her credit card debt, which often severely limits the available options. If you are considering bankruptcy, talk to a qualified debt settlement company first. National Debt Relief works with consumers to negotiate with creditors and settle debts on their behalf.
Remember, regardless of which path you choose, if you do not change the way you manage your money and close all of your credit cards, you could find yourself with credit card debt problems once again.