For many, credit cards are a tool designed exclusively to improve credit scores; proper credit card utilization is a helpful way to establish your ability to pay off debts month-to-month. There are many perks to credit cards as well — Travel Cards, for instance, can score users free or discounted plane tickets, car rentals, hotel stays, and more. These rewards, combined with proper credit card use, can be part of healthy financial habits.
However, there is a dark side to credit card use. When improperly used, they can rack up debt. According to Lending Tree, the average APR (or Annual Percentage Rate) on credit cards is 24%. That means that any interest on a $1,000 credit card for a full year, for example, could result in a $1,240 bill if you do not regularly pay off your credit card.
When cash on hand is low, credit cards are a tool that spenders feel they must use. When food, gas, clothing, and other amenities are crucial to maintaining your standard of living (or to simply make it to a job so that you can afford to pay off said credit card), then a credit card is crucial. However, at the end of the day, a credit card should be treated as a loan that needs to be repaid on time.
How has credit card usage changed in recent years, and what does it mean? Let’s discuss.
Credit Card Debt is at an All-Time High
As indicated by Forbes, consumers are relying more on credit cards to make necessary payments in 2023. The Federal Reserve noted a $61 Billion increase in credit card debt to a staggering $986 Billion.
Economic shifts like inflation are largely to blame for this substantial rise in debt. According to Forbes, a staggering 40% of survey respondents cited inflation as the reason for increased dependency on credit cards.
Rising costs have put a strain on many credit card holders. As noted by Axios, wages have grown on average by 1.2 to 2.2%, but this has not kept pace with inflation, meaning that struggling credit card holders are not seeing relief from wage increases. As a result, increased credit card dependency has only increased the financial strain, all to maintain a similar quality of life.
Who is Most Vulnerable?
In a study from Quicken Inc. published by Yahoo Finance, it was found that millennials and Gen Z are most vulnerable when it comes to credit card usage. As we approach a potential return to student loan payments, Quicken Inc. found that 53% of Millennials and 41% of Gen Z are seeing increased dependence on credit cards. 38% of the total surveyed respondents (or 380 out of 1,002) reported that they were using credit cards “to make ends meet.”
There are many factors here that can leave long-term negative impacts on Millennials and Gen Z. For starters, full-time workers with Bachelor’s Degrees do not tend to reach peak income until their 40s or 50s, meaning that younger workers are already in a vulnerable financial position. Second, rising costs from inflation put a strain on tight budgets — combining that with student loan debt AND credit card debt can only increase that vulnerability.
Debt can be a vicious cycle, especially considering that one cannot simply “stop spending” when having to afford the necessities to eat, work, live in a house or apartment, or raise a family. These necessities don’t just “go away.” Unfortunately, neither does debt.
What Can Be Done?
Paying off debts on time ensures that any credit card holder won’t fall victim to ballooned interest payments. Prioritizing necessary expenditures and making sure all bills are paid is the best way to maintain a healthy financial situation. Of course, that solution is not easy — if anything it’s only getting harder for younger generations to maintain their standard of living.
Prioritizing debt (referenced by Nerd Wallet as the Snowball Method) may be a good place to start. In the Snowball Method, debts are organized by amount, and the smallest balance is paid off first — once that debt is cleared, the payment is “rolled” into the ascending debt amounts. An alternative, known as the Debt Avalanche, replaces the “smalled” amount with the debt that has the highest interest rate.
Another important step is to know and understand your credit card. Credit cards continue to be an important tool, but they can cause problems if the tool is misused. Not all credit cards are the same — some have yearly membership fees, and some have exorbitant APRs. It’s important to understand how your card will be utilized, and doing the research ahead of time will prevent any troublesome situations down the road.
While debt won’t simply be eliminated out of goodwill, talking with your credit card provider and explaining your situation can help — after all, you are a customer of the credit card company, and there may be stopgaps in place to prevent catastrophe. Some companies even have “Hardship Programs” negotiated by the company that will temporarily lower interest rates through difficult times, particularly job loss.
Debt is an important component of your short and long-term financial well-being. Financial planning. The LPSC Financial team is here to help break down your goals and develop a comprehensive plan to alleviate any feelings of all-consuming debt. Debt, as a stressor, can be debilitating to your security and mental well-being; walking through a plan with a Certified Financial Planner may set you on the path you need to start your journey right.
Schedule a Call with LPSC Financial Today.
SOURCES
https://www.lendingtree.com/credit-cards/average-credit-card-interest-rate-in-america/
https://www.axios.com/2023/07/12/real-wage-gains-inflation
https://www.nerdwallet.com/article/finance/credit-card-debt
https://www.nerdwallet.com/article/credit-cards/what-is-a-credit-card-hardship-program