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Research of the Week: Are You on a Yo-Yo Diet of Debt Repayment?

Americans paid off $40.6 billion of credit card debt, then added $30 billion back.

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

The interesting studies

The debt experts at WalletHub track trends in consumer credit card debt. Each quarter they update their statistics to see how consumers have managed debt over the last three months. This week, they released the update for the second quarter of 2018 (April-June).

The big result

In the first three months of 2018, Americans paid off $40.6 billion in credit card debt. It’s the second biggest repayment period since tracking started in 1986. But in the next three months of the year, Americans piled almost $30 billion of credit card debt back on.

As you can see from the chart, credit card debt repayment has become equivalent to a yo-yo diet for many Americans. We pack on the debt one quarter, then feel guilty so we cut back the quarter. But once the balances are down, we start spending again and bounce right back up.

“Just like yo-yo diets aren’t good for your physical health, yo-yo credit card debt repayment isn’t good for your financial health,” explains Gary Herman, President of Consolidated Credit. “It’s hard on your budget, it can be bad for your credit score, and it certainly must increase people’s financial stress.”

The fascinating details

At the start of the Great Recession, Americans carried $56.2 billion of credit card debt. We ended 2017 at $91.8 billion. That means U.S. consumers currently have 104% more credit card debt than we did when the economy tanked.

Average debt per household is also back to pre-recession levels. The average American household currently owes $8,322. That’s just $129 below the amount the WalletHub has dubbed “unsustainable.”

“With average household debt so high, it means more and more households are headed for financial distress,” Herman says. “You reach a point where credit card debt payments use up so much income that you don’t have anything left. You start to juggle bills and put off necessary expenses because you just don’t have enough income. And if you’re on a yo-yo diet of debt repayment, the situation is probably getting slowly worse and worse over time.”

What you can do

“The challenge that many people face is that they’ve become dependent on their credit cards,” Herman explains. “You don’t have a balanced budget that builds in savings so you can maintain an emergency savings fund. As a result, you use credit to cover emergencies, repairs, medical bills and even daily expenses because you don’t have enough income. Although you may be able to stop spending for a month or two, unexpected expenses inevitably crop up and lead to new charges. It’s a vicious cycle.”

In order to break that cycle, many people need a way to force themselves to break their credit habit. That’s where solutions like a debt management program can be useful.

  1. You enroll in the program to pay off credit card debt at significantly reduced interest rates.
  2. In exchange for reducing your rates, your creditors close your accounts. That means you can’t keep spending.
  3. A credit counselor helps you create a balanced budget that doesn’t rely on credit cards to get by.

“Although it can be a tough adjustment to start living credit-free, it’s worth it,” Herman says. “And this can be more effective than do-it-yourself debt relief solutions, because you’re forced to stop charging. With solutions like balance transfers and consolidation loans, there’s nothing to stop you from running your balances right back up. That’s why these DIY solutions often fail.”

If you’re stuck in a cycle of debt and you need to break your credit habit, talk to a certified credit counselor to see if a debt management program is the best solution for you.

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