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If you think people with credit card debt must be frivolous spenders, think again. It’s not just “wants” that triggers credit card debt.
It turns out that many Americans face thousands of dollars in credit card debt because they are paying for important “needs.”
As the holiday shopping season kicks into high gear, some Americans are saddled with credit card debt simply from making ends meet. For these Americans, holiday spending creates a new financial juggling act and avoiding additional credit card debt could be a challenge.
Forty two percent of Americans with credit card debt reported making ends meet was a major factor in their debt, according to a new CompareCards.com by LendingTree survey of 1,000 American adults who did not pay their credit card balance in full in the past month.
Spending on car repairs (29 percent) and medical bills (27 percent) were also reported as major factors causing credit card debt, the poll found.
Credit Card Debt Findings
The survey focus was on key drivers for this debt, stress levels around the debt and plans to pay it off. The results show that many Americans face significant challenges making ends meet:
- The average balance Americans carry to the next month is $5,975.
- Millennials are more likely than older Americans to be stressed about credit card debt. 86 percent of millennials with credit card debt are stressed by it compared to 72 percent of Americans age 35 and over.
- About a quarter of people (28 percent) had two or more cards with a balance they can’t pay off in full this month.
Baby Boomers and Debt
Baby boomers are more likely than millennials to need a lengthy time to pay off their balance.
- Forty-nine percent of baby boomers estimated it would take them a year or more to pay off their credit card balance, versus 28 percent of millennials who expected to take a year or more.
For people approaching or already in retirement, high-interest credit card charges can be especially dangerous. High-interest charges siphon funds that could be used to save for retirement or pay for living expenses on a fixed income.
Retirement is a time where you switch from saving money to living off your savings, says Hans Scheil, CFP®, CEO of Cardinal Retirement Planning Inc. “Savings are going to drain significantly quicker if this debt is carried through retirement,” Scheil says.
“I have had many clients who want to retire in a year or two. We tell them that it is just not possible with the debt they have. They must push off retirement for even longer,” Scheil says.
Top Expenses that Create Millennial Credit Card Debt
For younger Americans facing credit card debt, millennials are more likely to report eating out as a major cause of their debt.
Top expenses that create credit card debt for those under 35:
|Making ends meet||40%|
Some of these expenses could be trimmed with careful budgeting.
If you find yourself unable to pay off your credit card balance every month, then by definition, you are living beyond your means, says Carla Dearing, CEO of SUM180, an online financial wellness service. “Allowing this situation to continue can have serious consequences for your financial security now and into the future,” Dearing warns.
3 Tips to Adjust Spending
- Know your number. Many of us have no idea what our expenses add up to every month. Find out your number. This will empower you to align your spending to your priorities and zero in on ways to save. A simple spreadsheet can do the trick, Dearing says.
- Identify a few monthly expenses you can do without and dump them. For one person, the eliminated expense may be premium cable and a too-generous data plan. For another, it may be online shopping and extra spending on eating out, Dearing says.
- Audit your credit card statement to purge subscriptions or memberships you no longer need. If you haven't done a serious credit card review in a while, you may be surprised to see how many charges are automatically showing up on your credit card every month, Dearing says.
Getting Out of Debt
Most Americans (73 percent) say they have a plan to pay off their credit card debt. Yet, 63 percent have never used a balance transfer credit card, the survey found.
Balance Transfer Cards
The survey shows more education is needed around financial products that can help those who are in debt. Fifty percent of Americans in credit card debt are not sure how a balance transfer card works.
- Millennials (18-34) were least likely to understand how a balance transfer offer works at 64 percent.
Balance transfer cards offer an escape route from high-interest debt. A balance transfer allows people to move high-interest debt from one credit card to another with a 0% interest introductory period.
Some balance transfer cards offer a year or even longer of 0% interest, which can save people hundreds of dollars in high-interest charges. That gives people time to pay down debt, with no new interest charges piling up on that balance.
“If you can transfer the balance from a higher cost card, you can pay that balance off much more quickly if it’s not accumulating interest. Be aware that the 0% interest rate does not apply to new spending,” Dearing says.
Tackling high-interest credit card debt has far reaching benefits. “Every penny you pay down on your credit card saves you a lot of money in the long run,” Dearing notes.
Be Realistic and Develop a Plan
To take full advantage of the opportunity a balance transfer card offers, it is important to be realistic, plan, and address spending issues. Otherwise a balance transfer card could just prolong the debt cycle.
“I know from experience that not everyone crosses the finish line,” says Bruce McClary, vice president at the National Foundation for Credit Counseling.
People using a balance transfer need to be careful about future spending. A 0% intro interest period on balance transfers does not mean it’s a free pass to spend.
McClary offers advice for those considering a balance transfer:
- Plan to stop taking on new debt so you can be successful in paying down debt.
- Once the balance is moved over, you will have a credit card with an unused credit limit. Make sure you aren’t using that old card because you could potentially increase your debt.
- Do the math to confirm you can repay the balance during the 0% intro interest period.
“It’s simple math. Take your balance and divide it by the number of 0% intro interest months. That is the minimum you should be paying off to clear your balance in time,” McClary says.
"The 0% intro interest offer gives you the carrot you need. But, to take full advantage of it you need to have that balance zeroed out before the clock runs out,” McClary says.
Give yourself a buffer in case of emergency situations, McClary adds. “Be careful. If you miss a late payment or are late that could void the intro interest deal.”
CompareCards.com created a step-by-step guide to help walk people in debt through the balance transfer process. See that guide here.
Debt Triggers High Stress Levels
Not surprisingly, carrying credit card debt triggers stress levels, the survey found. Simply seeing the high-interest debt compound each month can generate stress. Doing a balance transfer is one way to alleviate that stress.
- 53 percent of millennials say they are somewhat stressed about credit debt.
- 86 percent of millennials are either somewhat or very stressed about credit card debt.
Why People Get Credit Cards
There are numerous benefits to paying with a credit card, including safety and financial protections that debit cards don’t offer. Building credit history is another important benefit from using a credit card responsibility. In fact, more than half of American pointed to credit building as a key reason they got a credit card.
Using a credit card is a valuable tool when used responsibly to build credit history. “Open a credit card with a modest credit limit and use it regularly. Then, and this is key, be sure to make all your monthly credit card payments on time and in full,” Dearing says.
“Doing this will help you build a solid credit history. You’ll need it to qualify for a loan someday, like when the time comes to buy a house," Dearing adds.
Opening a credit card is a smart money move. Credit cards are a convenient and safe way to make purchases and can help provide positive credit history when used responsibly. However, it is important to understand how credit cards work to take full advantage of the benefits that they offer.
Consider these strategies to avoid credit card debt and to promote a positive credit score:
- Pay your bill on time each month to avoid late fees.
- Make it a goal to pay your balance in full each month.
- Establish an emergency fund to cover up to six months of living expenses. You can tap this fund for unexpected medical bills or car repairs as opposed to racking up debt on a credit card.
Consider “needs” versus “wants” when making new purchases. If you can’t pay off a non-essential item in full when the credit card bill is due, think twice before buying.
Read more tips here: 6 Habits of Consumers with Excellent Credit Scores
CompareCards.com by LendingTree commissioned Qualtrics to conduct a national survey of 1,000 American adults who said they had credit card debt they couldn’t pay in full in the past month. The survey was fielded online in September, 2017.