| March 18, 2016

Research of the Week: Another Credit Card Debt Crisis?

Balances reaching unsustainable levels seen during the Great Recession.

Each week, Consolidated Credit searches for financial research that can help you deal with your debt and budget. This week…

The interesting study

CardHub.com released a 2015 Credit Card Debt Study that has reporters from CNBC to The Street asking if 2016 is going to be another 2008 for consumers with credit card debt.

 

The big result

Why 2008? That’s the year that started the Great Recession. The housing market collapse and subsequent stock market plunge combined with high revolving debt levels to leave millions of Americans facing financial distress that was extremely scary for those who went through it. Even families who thought they were stable had the financial rug pulled out from under them that year. So if 2016 is another 2008, then people need to take note.

The fascinating details

Basically, it comes down to the fact that households took on significant credit card debt during 2015 and didn’t do as well about paying it off. As a result, there was a $71 billion net increase in total nationwide credit card debt levels last year.

Most of that debt is a result of the winter holiday shopping season. CardHub.com comments that the increase happened, “largely because we incurred nearly as much new debt during the fourth quarter of the year as we did during all of 2014.”

The debt load was broken up by total outstanding debt of $45.5 billion accrued in 2015 and $25.5 billion in charge offs that year – those are accounts that were written off by the original creditor and sent to collections. That’s 24% more debt than what we accrued in 2014. Perhaps even more telling, that’s a 2822% increase from 2010 and an 8006% increase from 2009.

In other words, the years following the start of the Great Recession saw a dramatic decrease in the amount of credit card debt consumers took on because most people were working to eliminate debt that was crippling their household finances. Now as the economy has improved and people’s circumstances have recovered, we seem to have forgotten the hard lessons we just learned.

The most concerning part of the study comes in the fact that average household debt is reaching the level that CardHub.com has marked as “unsustainable.” Households now carry an average debt of $7,879. That’s roughly $500 below CardHub.com’s unsustainable mark.  Essentially, once the unsustainable mark is passed, households are officially at a point of financial distress. If the average household debt hits that level, it serves as an indication of just how many households will be in serious trouble with debt this year.

What you can do

There are two big things you can do to avoid being part of the potential credit card debt crisis this year:

  1. Stop charging
  2. Reduce your debt

Of course, both of those may be easier said than done but at the end of the day, both are necessary if you want to avoid the financial distress that other households may face this year.

Here are some tips to make those two critical steps happen for you this year:

  1. Start by evaluating your household budget. Can you cover all your monthly bills and necessary expenses with your monthly income? If not, how much are you in the hole each month?
  2. See if you can cut back. If your budget isn’t balanced, then you’re probably going to have a hard time to stop spending because you need your credit cards to cover monthly expenses that fall in that gap in your budget – basically everything you can’t cover with income is getting put on credit.
  3. Look at discretionary expenses. The first place you may be able to cut back is with discretionary expenses – the nice-to-haves in your budget. Check to see if you have multiple media streaming (either movies, TV or music) that may overlap and cut back to one; cut back your cable package; eat out less; cut back on entertainment; cancel subscriptions you no longer need; reduce your charitable donations.
  4. Plan out big expenses. Another way people add to credit card debt is by putting too many big purchases in on a single month. Your TV is on the fritz, you also need new tires, the dog needs to get spayed, and you and the kids need spring wardrobes. That’s too much in a single month, so decide what can wait and spread out the costs of those big-ticket items over the next several months.
  5. Consolidate your debt. When done correctly debt consolidation does several things for you:
    1. It reduces the total monthly payment on your credit card debt
    2. It simplifies your life because you only pay a single bill instead of several
    3. It reduces the interest rate applied to your debt, so even though you pay less each month you typically get out of debt much faster.
  6. Plan ahead to avoid debt this year. Once you have your debt consolidated, this should make some breathing room in your budget. Divert all or most of that freed up cash flow to savings.
    1. Create a financial safety net so you can cover unexpected expenses with cash
    2. Start allocating savings and setting money aside for big expenses during the year, like family vacations and the holidays.

Adjusting your budget will allow you to stop charging, while consolidating your debt will help facilitate being able to eliminate it faster. Finally, increasing savings will help you maintain that credit-free stability throughout the year.

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