Total New U.S. Credit Card Debt Jumps Over 25 Percent in One Year
New credit rises to six year high, but can consumers really handle the debt?
The latest National Consumer Trends Report from Equifax proves that Americans aren’t all that scared about taking on new debt in the post-recession era. Total non-mortgage / non-student loan credit originated through May of this year topped out at $365 billion. That total includes auto loans, bank and retail-issued credit cards and other consumer financing options.
This is the most new debt we’ve seen in the past six years – effectively, since just before the real estate market collapse that started the recession in 2008. It is also an 11 percent increase from the same time last year. Bank-issued credit cards alone generated $96.4 billion in new debt – a 25.4 percent increase from last year.
Still, it begs the question of whether the average American consumer is really prepared to handle that much debt or if we’re simply falling back into bad habits now that the economy is in recovery. This uncertainty has experts like Gary Herman, President of Consolidated Credit, concerned.
“When things got tough and the economy was weak, most consumers started to cut back, pay off debt and focus on savings,” Herman points out, “but now in the recovery, at least some consumers are backsliding. If we don’t take away the lessons we learned during the recession, we may be doomed to repeat the financial panic of a few years ago.”
5 tips for financial stability
If you don’t want to repeat the mistakes of the past, Consolidated Credit offers these five tips for maintaining financial stability no matter what happens with the economy:
- Don’t hold onto debt. Create budget strategies that allow you to pay off your debt as quickly as possible. Start with your credit cards and smaller loans, then work your way up to paying off your car and home if you have the means.
- Don’t overspend on credit. Maxing out every credit card you have is a recipe for financial disaster (and bad for your credit score, too). Keep your credit utilization ratio low – meaning, don’t overspend and hit the credit limit on every card.
- Know your DTI. Your debt-to-income ratio measures the amount of debt you have relative to your income level. This is a good indicator of your financial health. To qualify for a new mortgage, you have to have a DTI of 41 percent or less, but we recommend maintaining your ratio at around 36 percent or less so you have some financial wiggle room.
- Save, save, save! Instead of a “spend, spend, spend” mentality, flip the script and start saving. You should be putting away five to ten percent of every paycheck you bring home, in addition to any pre-tax deductions for long-term savings that your employer takes out for you.
- Keep your credit score high. A high credit score allows you to negotiate with creditors to get the best interest rates and terms on new loans and credit cards. It also allows you to negotiate with your existing creditors if you want to reduce your interest rates or refinance. All of this can help keep debt minimized and help you avoid financial distress.