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.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free 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
- To Achieve Financial Stability, Start With Small Steps
- Are You Overlooking Your Financial Institution’s Resources?
- Three Ways to Lessen Financial Stress and Create Work-Life Balance in 2024
- Four Reasons Credit Unions Are a Good Bet in Unsettled Times
- Five Ways You Can Assess, Manage and Pay Off Debt
-
3M, GM, Blue Chips Lead to the Upside: Stock Market TodayThe S&P 500 followed the Dow Jones Industrial Average into green territory, but the Nasdaq lagged the other indexes because of its tech exposure.
-
Social Security Payment Schedule for 2026Find out when you can expect your 2026 Social Security payments and the date you get paid when your scheduled day falls on a holiday.
-
Should Your Brokerage Firm Be Your Bookie? A Financial Professional Weighs InSome brokerage firms are promoting 'event contracts,' which are essentially yes-or-no wagers, blurring the lines between investing and gambling.
-
Supermarkets Have Become a Pickpockets' Paradise: How to Avoid Falling VictimSome stores regularly rearrange inventory with the aim of increasing purchases, and they're creating opportunities for thieves to steal from customers.
-
I'm a Wealth Adviser: These Are the Pros and Cons of Alternative Investments in Workplace Retirement AccountsWhile alternatives offer diversification and higher potential returns, including them in your workplace retirement plan would require careful consideration.
-
I'm a Financial Planner: If You're Within 10 Years of Retiring, Do This TodayDon't want to run out of money in retirement? You need a retirement plan that accounts for income, market risk, taxes and more. Don't regret putting it off.
-
Five Keys to Retirement Happiness That Have Nothing to Do With MoneyConsider how your housing needs will change, what you'll do with your time, maintaining social connections and keeping mentally and physically fit.
-
Budget Hacks Won't Cut It: These Five Strategies From a Financial Planner Can Help Build Significant WealthCutting out your daily latte might make you feel virtuous, but tracking pennies won't pay off. Here are some strategies that can actually build wealth.
-
To Unwrap a Budget-Friendly Holiday, Consider These Smart Moves From a Financial ProfessionalYou can avoid a 'holiday hangover' of debt by setting a realistic budget, making a detailed list, considering alternative gifts, starting to save now and more.
-
Treat Home Equity Like Other Investments in Your Retirement Plan: Look at Its Track RecordHomeowners who are considering using home equity in their retirement plan can analyze it like they do their other investments. Here's how.
