Credit Card Consequences

Bankrate recently shared a survey revealing that half of all Americans are carrying a balance on their credit cards from month to month. There are many reasons why these credit card balances are being carried, i.e. inflation, rate increases, job losses, or extraneous spending. With these extenuating balances, what can individuals and families do to pay down this specific type of debt?

Who and Why?

Before we can answer that question, who are those individuals who are most likely to go into debt and why? From the same Bankrate survey, they examined the generational breakdown of who was likely to carry a balance from month to month, which ended up being:

• 42% of Gen Z
• 53% of Millennials
• 60% of Gen X
• 48% of Baby Boomers

A Forbes Advisor survey from February of 2024 asked the question of what were the two primary reasons consumers were using credit cards and found that:

• 41% of Gen Z and 40% of Millennials are more likely to use credit cards to build credit.
• 43% of Baby Boomers use credit cards because they are safer than cash.
• Ultimately, 35% of everyone surveyed indicated their primary use of credit cards was to earn rewards.
• 28% of people indicated they use credit cards to cover expenses they couldn’t afford with their income or savings.

Even with these generally positive reasons in mind, American card balances hit a new record of $1.14 trillion by the end of the second quarter of 2024 according to a Federal Reserve Bank of New York report. With only a few months until end of the year holiday spending takes place, it is likely we will continue to see this number rise going into 2025.

It’s worth noting that in Bankrate’s survey, even though 50% of Americans carry a balance month to month, the other 50% pay off their balances in full. And it’s no fluke. Forbes found that those individuals continued to feel confident that they would be able to pay off their balances in full. What can the other 50% do to achieve this continued success?

Taking Action

It starts with having a plan. Waiting for a sudden windfall of extra money to handle past debt is unlikely, so creating a plan of action puts control over your circumstances back in your hands. When creating your plan, think about what will work best for you. Your plan should be broken down into manageable steps to make it easier to engage with on an ongoing basis. Here are some suggested steps you can take to handle credit card debt.

Step 1 – Track your spending.

As the famous G.I. Joe quote says, “knowing is half the battle”. Being aware of your current spending patterns will help you avoid the situation becoming more difficult by giving insight into how you use your credit cards so you can make informed decisions when changing spending habits.

There are several ways you can track spending:

• Using a physical or digital card so that you can access a list of transactions on your banking statements.
• Keeping physical copies or taking a photo of receipts to maintain accurate records.
• Keeping a note (either physical or digital) so that when you spend money you can write down details such as how much you spent, where, and with what card.

Step 2 – Build a budget.

With all of the spending being tracked, the next step is to build a monthly budget. Using a budget will provide valuable information on how your spending balances out against your monthly income. Once you have your consistent income established, list all of your ongoing fixed and variable expenses. Create categories for general spending like groceries, transportation, deliveries or dining out, entertainment, etc. Examine where you might be able to save money by either realistically reducing categories or finding cheaper alternatives.

Step 3 – Ensure savings are in place.

Even though the goal is to put more money towards paying down debts, it is wise to have ongoing deposits towards retirement and emergency funds. How much money is needed for both retirement and emergencies will vary depending on the individual and their lifestyle. Saving early for retirement helps build your compounding interest which can yield exponentially larger results later down the road. Saving for emergencies can help you avoid taking on additional debt by having a fund ready when an emergency does take place.

Step 4 – Create a payment plan.

With your budget established and your savings plan in place, the next step is to create your ongoing plan for paying down the balances. Rather than spreading out extra money to different monthly payments, focus all of the extra towards the debt with the highest interest, the largest monthly payment, or the smallest balance, and you can move through your goals faster. These options help avoid more interest being added on or create more funds available to continue paying down debts.

Step 5 – Consolidate

With a plan of action and ongoing tracking to keep you on the right path, your next option is to consolidate your debt. Utilizing a lower interest rate credit card to transfer balances to can help improve your revolving debt balances which in turn can improve your credit score for other options down the road. Consolidating can lower not only the interest rates on your debt, but also the monthly amount needed towards payments. By handling Step 4 first, any extra money you had in place can now go towards this one monthly payment for ease in management.

Conclusion

Even though half of Americans are carrying a balance on their credit cards, by creating a plan of action they can begin to take steps towards lowering their debt. If you’re interested in getting help to create a plan or budget, or exploring consolidation options, you can schedule a free coaching call with a certified credit union financial counselor here: CAFCU Financial 1-on-1.