Throughout my career, I have observed firsthand the ebbs and flows of the economy and its profound impact on the financial lives of consumers. In recent years, a troubling trend has emerged: a significant rise in the reliance on credit cards, fueled by soaring prices for essentials. This shift has pushed many Americans into deeper debt, as highlighted by the New York Federal Reserve, which shows a record $1.1 trillion in U.S. credit card balances in the fourth quarter of 2023.
With 45% of American adults burdened by credit card debt, the situation is dire. The about 25% year-over-year surge in credit card balances, coupled with a 16% drop in total repayments, is alarming. These figures are not just mere statistics; they symbolize a potential long-term financial crisis for consumers. The challenge is multifaceted, fueled by an environment of high interest rates and inflation, which only serves to prolong the debt cycle for many.
Take action by getting help
It's crucial that consumers facing debt not shy away from their financial realities. Banks and credit unions provide resources designed to aid in debt management, including financial education and personalized coaching. Consulting in-person with your bank or credit union’s debt management expert can build a partnership, giving individuals an opportunity to regain control of their financial futures.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Debt management programs can also play a critical role. Offering a blend of budgeting assistance, financial planning and negotiation services, these programs can provide a roadmap out of debt.
However, consumers must approach these services with caution. Some claim to lower your outstanding debt through negotiation, which can be expensive and carry hidden costs and potentially adverse implications for credit scores and taxes.
Go back to the basics
When looking to get out of debt, return to basic financial principles. Set and stick to a budget. Do the math and sort out the cost of essentials, including utility bills, each month. Assess your discretionary expenses and make some tough decisions. What can you do without as you work to draw down your debt? Then set goals for the next year.
As part of your discussions with a trusted financial professional, determine how much debt you can pay off over the next year. Both exercises will help you live within your means, reduce dependency on credit and enhance overall life quality.
Make smart decisions and avoid traps
With a plan in place to pay down your debt, it’s important to make smart financial decisions to avoid digging yourself into a further hole. When you have to make a significant purchase, say replacing your home’s furnace, consider what makes more sense — running up your credit card balance by five figures or opting for a loan.
I advocate for a prudent approach: If repayment within a short time frame is unrealistic, securing a loan with a more favorable interest rate and structured repayment plan may be more advantageous. Shop around for a good rate. Oftentimes, credit unions offer better rates than some of the major banks.
The popularity of Buy Now, Pay Later (BNPL) reflects a changing landscape in consumer finance. While these services offer an alternative to traditional credit, they are not without risks, particularly for those in fragile financial positions. A recent survey from the New York Fed found that 43% of households with a credit score of 620 or less have used BNPL.
Many times, people turn to this option due to credit card delinquencies or because their credit application was denied. If you miss a payment using one of these services, the debt may grow more exponentially than it would with a typical credit card. Be sure to fully understand the terms and potential consequences before considering this option.
The broader impact
The repercussions of debt extend far beyond finances. It affects individuals' mental and physical wellbeing, their capacity to save for the future and their freedom to make significant life choices. Consider the effects of facing deep debt:
- Not able to save for large purchases, like vehicles
- A depleted emergency fund, which can leave a person vulnerable to unexpected monetary obligations
- Retirement contributions left short, sacrificing the future
- No vacations
- No saving for your child/children’s education
- For younger folks in debt, it’s very hard to save for a house
- Decreased credit scores, leading to higher debt
The surge in credit card debt should serve as a wake-up call for a collective push across banks and credit unions toward enhanced financial literacy programs, support, and a culture of responsible borrowing. Leaders in the financial sector should remain committed to guiding consumers through these turbulent times.
Through education and support, we have the power to help consumers facing steep debt to turn their financial lives around and to set the next generation of consumers on the path toward financial responsibility.
Related Content
-
A Guide to Music Streaming ServicesDeals Our guide to music streaming services from Spotify to Amazon Music, Tidal to Apple Music and how to find music streaming deals.
-
Stock Market Today: Markets Reflect Global UncertaintyExuberance fades as investors confront micro challenges and a murkier macro environment.
-
What's Better Than Investing in Crypto? These 'Boring' PicksCryptocurrency may be good for a thrill, but older investors are better off with assets like bonds, guaranteed annuities, CDs and maybe dividend-paying stocks.
-
Four Actions to Lessen Retirement Stress for Women (and Men)Saving for retirement is anxiety-inducing for everyone, especially women. Following this four-part action plan can help improve your financial security.
-
Year-End Retirement Tax Planning Actions if You Have $1 Million or MoreConsider implementing these four strategies before December 31 to potentially improve your tax situation for this year and the future.
-
Five Simple Strategies to Ensure a Happy RetirementEmployer retirement plans are great, but individual responsibility plays a huge role in retirement success. Here's how to empower yourself.
-
25 Financial Moves to Consider Before December 31Tidying up your financial house before the New Year kicks off will put you in a great position to have a financially satisfying and successful 2025.
-
Five Side Hustles You Could Turn Into a Full-Time BusinessYou might be able to capitalize on your expertise in ways you haven't thought of, possibly even leading to quitting your 9-to-5 job to do what you love.
-
Which of These Three Types of Soon-to-Be Retirees Are You?Some folks are concerned. Others are lacking clarity. But what you really want to be is confident. So, how do you stack up?
-
Will You Have a Retirement Income Gap? How to Fill ItTo ensure your expenses in retirement are covered, you need to know what sources of income you'll have and where to turn to make up for any shortfall.
