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
-
Visa Is the Worst Dow Stock Wednesday. Here's WhyVisa stock is down sharply Wednesday after the credit card company came up short of revenue expectations for its fiscal Q3.
-
Another Analyst Moves to the Sidelines on Tesla Stock After EarningsTesla stock is spiraling Wednesday after the EV maker's big earnings miss and Wall Street has been quick to weigh in. Here's what you need to know.
-
Confused by Annuities? Making Sense of the Different TypesMany investors aren't sure if annuities are a good option for meeting financial goals. Let's look at the different categories, along with their pros and cons.
-
Talkin' 'Bout My Generational Wealth: Baby BoomersWith retirement, each generation has different priorities and challenges. For Baby Boomers, it's a matter of ready or not, here it comes.
-
How to Avoid a Big Hassle if Your Financed Car Gets WreckedHow an insurance check is made out for repairs can cause a world of problems if the lienholder is left out.
-
Estate Planning Strategies to Consider as Election NearsAre big changes in tax laws coming soon? Not likely, but you might want to take advantage of higher estate and gift tax exemptions well before the end of 2025.
-
How to Get Your Money's Worth From Your Financial AdviserA good financial adviser will focus on how your financial planning and investment strategy align with your lifestyle and aspirations.
-
Think of Prenups and Postnups as Financial Planning ToolsThese contracts provide a clear framework for asset management and protection and are especially useful if you get married later in life.
-
Congratulations on Your Raise: Three Things to Do With ItWe're not saying you shouldn't spend it on a new car, but there are some considerations to guard against lifestyle creep and to help ensure a comfy retirement.
-
Check Off These Four Financial Tasks to Finish 2024 StrongThe new year is a popular time to set financial goals, but now is the ideal time to check how you're doing. Four tweaks could make a big difference.
