A new survey finds most people go into debt trying to make ends meet.
The interesting study
Credit card debt balances continue to climb in the U.S., with total debt hitting $1.023 trillion at the end of November last year. That means balances likely already much higher, with the rest of winter holiday shopping factored in. The average family that uses credit cards carries a total balance of over $16,000. So why are credit card balances so high right now and what does it mean for the average household?
A new survey by LendingTree looks at why people go into debt in the first place. They polled 1,000 American families with credit card debt to see what caused it.
The big result
The most common cause of credit card debt is rooted in budget gaps caused by lack of income. In fact, 42% of Americans say they got into debt just by trying to make ends meet.
The fascinating details
These are the top reasons for going into credit card debt:
- Making ends meet 42%
- Car repairs 29%
- Medical bills 27%
- Eating out 22%
- Clothes shopping 22%
- Home repairs 21%
- Vacation expenses 18%
- Job loss 14%
- Student loans 10%
- Child care 6%
- Wedding expenses 4%
All that excess debt has many Americans feeling financially stressed. Overall, 76% of people with debt are at least somewhat stressed about it.
- 51% of credit users are somewhat stressed about their debt
- 25% of credit users are very stressed
- People under age 35 are the most stressed about debt – one third (33%) say they are very stressed
Interestingly enough, people don’t get credit cards with the idea of using them to cover daily expenses. Most people say they get credit cards to build their credit score>
- 58% want to build credit
- 55% wanted a card in case of emergencies
- 38% got one for convenience
- 25% wanted to earn rewards
- 22% were financing a specific purchase
What you can do
“Most people don’t get credit cards to act as substitute for income,” says Gary Herman, President of Consolidated Credit. “But you get a card for emergencies and then emergencies seem to come up every month. You have a car repair one month, need to replace a broken set of glasses the next, the dog has emergency surgery the next month – it just keeps going. Before you know it, the thing you got to cover emergencies is now causing them.”
Herman says most households need to improve their budgeting strategy in order to avoid credit card debt.
“By building an effective household budget that factors in savings and emergencies,” Herman explains, “you can avoid constant charges. But if you budget down to the last penny every month, it often leads to debt to cover the expenses you don’t expect.”
Learn How to Build a Budget that Works
Learn how to build a stable budget that can effectively house all your expenses, including credit card debt payments and built-in savings.
A good budget provides a framework for financial stability and success. You build a stable money management structure that allows you to reach your financial goals. All of your monthly expenses should fit somewhere into that structure so you can avoid taking on high interest rate credit card debt for things that should be covered by cash.
Here’s a quick look at how a balanced budget works.
Building a budget starts by laying the foundation and adding up your total monthly income. Expenses should be separated between one of three levels – fixed, flexible and discretionary.
The first level is where all your needs with a fixed cost live. That’s any need with a cost that stays the same every month. The next level is where needs with no fixed cost live. In other words, things you can’t live without but the cost can vary from month to month. The final level is where your wants live. You know, the things that aren’t necessary but make life fun.
Credit card debt payments can live in one of two places in your budget, depending upon how much debt you have. If you have low balances and pay off what you charge at the end of every month then credit card payments live with those other flexible expenses. However, if you have large debts to pay off make big payments every month until you’ve paid it off in full.
Discretionary expenses are where all the fun and frills live in your budget. And this is where you should start if you need to make cuts to scale back. Savings often gets treated like a discretionary expense and shoved in with the rest of your wants, which means it can get lost in the mix or cut entirely. But really, savings should move in with your fixed expenses. Decide how much you can save each month and make that a set cost in your budget that you pay to yourself every month.
Once you’ve constructed a budget, you have to maintain it to make sure it stands up over time. Every few months compare your actual spending to what you planned to spend. This will make sure you’re keeping everything within the structure you set. This ensures that your financial house can hold all of your monthly expenses so credit cards don’t have to cover what’s been left out.
If you see you’re overspending consistently somewhere you may need to work on your budget again to make sure it’s not too bloated to fit the foundation. In some cases this may mean you have to cut something to make room. Eliminating debt or adding income will give you the ability to add these expenses back once you have room to fit them in.
For more advice about budgeting and managing money visit consolidatedcredit.org.
These tips can help ensure you stay on track:
- Treat savings as expense. Save 5-10% of your income and set it as a recurring expense in your budget.
- Savings is not free cash flow. Do not leave saving for the money you have left over at the end of the month; it’s a good way never to save anything.
- Expenses should ideally only take up 75% of your monthly income. That 75% should include savings; that leave 25% of your income as free cash flow that can be used to cover unexpected expenses.