Being in credit card debt has become the American way. According to the Federal Reserve, Americans are carrying 874 billion dollars in revolving debt. While the Visa, Mastercard and AMEX logos are displayed on most storefronts, having a credit card doesn’t give consumers a free pass to go shopping.
With unemployment statistics staying unchanged at 10% and creditors adding more fees, consumers are struggling to make their credit card payments. Recently, the Wall Street Journal reported that credit card charge-offs are expected to peak somewhere between 12% to 13% in mid-2010. More than ever consumers need to distance themselves from credit card dependence before they fall into financial crisis.
Having a credit card does have its advantages. It gives consumers the ability to buy items now without carrying cash. It creates a record of purchases which is useful when trying to stick to a budget. Unlike checks, they’re easier to manage and are accepted at most businesses. Because credit cards are so easy to use, many consumers can fall prey to impulse shopping or lose track of how much they’ve spent until they get their credit card bills. Relying on credit cards to pay for purchases is a trap you want to avoid. Unless you pay the balances off in full, adding on interest can mean you’re paying more than items are worth.
Consolidated Credit suggests ways to use credit cards without being dependent on them:
- Create a Budget — to reduce the likelihood of impulse shopping or losing track of spending, create a budget to track all income and expenses.
- Borrow Only What You Can Repay — creditors make their money through interest payments and fees. Ideally, consumers should be able to repay borrowed money at the end of the month. Consumers should avoid borrowing more than 15% of their annual net income.
- Start an Emergency Fund — every month, consumers should be putting away 10% of their net income into a savings account. This emergency fund can be used to cover car repairs, unexpected medical expenses and other emergencies instead of using a credit card.
As economic burdens increase, consumers are paying less on the principal of their debt. In November, the percentage of principal balance card holders repay each month fell to 16.4%. Consumers that are struggling with their credit card payments, and paying more than 10% of their monthly net income, should consider contacting a non-profit credit counseling agency, like Consolidated Credit, for help. At that point, the monthly payments on the credit card bills exceed the consumer’s ability to pay it back. Many consumers in this situation need a debt management program to get their finances back on track.