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Research of the Week: What Causes America’s High Credit Card Balances?

A new survey finds most people go into debt trying to make ends meet.

Americans are burdened by more household debt than ever

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:

  1. Making ends meet 42%
  2. Car repairs 29%
  3. Medical bills 27%
  4. Eating out 22%
  5. Clothes shopping 22%
  6. Home repairs 21%
  7. Vacation expenses 18%
  8. Job loss 14%
  9. Student loans 10%
  10. Child care 6%
  11. 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

  1. 58% want to build credit
  2. 55% wanted a card in case of emergencies
  3. 38% got one for convenience
  4. 25% wanted to earn rewards
  5. 22% were financing a specific purchase

What you can do

“Most people don’t get credit cards to act as a 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.”

These tips can help ensure you stay on track:

  1. Treat savings as expense. Save 5-10% of your income and set it as a recurring expense in your budget.
  2. 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.
  3. 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.

Are high credit card balances keeping you from achieving budget balance? Talk to a certified credit counselor to find relief.

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