Americans have seen a lot of water under the bridge in the past two and a half years.
A global pandemic has led to restrictive community shutdowns. A major land war in Eastern Europe. High inflation and prolonged delays in the supply chain, affecting everything from silicon wafers to sand wedges.
With all eyes on the healthcare sector, the economy and the geopolitical landscape, it appears that American consumers have at least one eye on when it comes to credit card spending.
A new study by Anytime Estimate reports that 46% of Americans now owe credit cards, with an average debt load of $6,093. In addition, the study noted that 66% of credit card holders in the United States who do not have credit card debt “may soon see themselves in default on card payments.”
Thus, it is not surprising that Americans categorize credit card debt as bone A stressful form of debt, pre medical debt, student loan debt, mortgage debt, and more.
The study also found that 80% of credit card debt holders are also in some other form of debt, which makes paying out-of-pocket emergency costs nearly impossible. About 33% of cardholders say they can’t cover a $2,000 emergency without borrowing, and 43% say they rely on their credit cards for basic expenses like housing, food, and utilities.
There is a reason credit cards are a cause for concern among many financial consumers. It brings more risk to lenders, who have a built-in insurance policy to cover their financial risks.
“Credit card debt is much more stressful than a mortgage or car loan because of the interest rate,” said Bill Hardikopf, chief industry analyst at Money Crashers. “Car loans and home loans are secured, so the bank can take back your car or home if you default on one of these loans. But a credit card is an unsecured short-term loan; no bank can repossess the stereo system you might buy with your credit card.”
To compensate for this increased risk, cardholders make sure that the interest rate charged on a credit card loan is much higher.
“So a credit card loan is very expensive compared to these other loans,” Hardikopf told TheStreet.
Unlike credit cards, mortgage and auto loans also have a limited structure that can increase the risk of consumer debt.
“There is a set timeline that will eventually lead to full ownership of the funded component,” said Teresa Arrigo, financial advisor to GenWealth Financial Advisors. “Credit cards design the minimum payment in such a way that the owner is never likely to pay it, especially if they continue to use it.”
In addition, credit card debt tends to increase.
“If you use credit cards for everyday expenses, it’s easy to accidentally overspend and get to a point where you can’t pay when the bill arrives,” Arego told TheStreet. “Credit card debt builds up faster when we try to own things that we can’t afford when we are in the moment.”
“Living beyond your means creates a snowball effect and can build up very quickly,” she added.
A way to reduce credit card risk
The first step to getting out of credit card debt is to stop using the credit card.
“Set yourself a budget and only pay for things on a debit card or cash,” Hardikopf said. “Put the cards away so they are no longer in your wallet or purse; that would remove the urge to use them.”
Another good step is to make as much of your monthly card payments as possible.
“Never only pay the minimum amount,” Hardikopf noted. “If you do this, you will pay off your debt for years.”
After paying your monthly bills, funnel any excess money to your credit card bill and add credit card “micro payments” to your payment kit.
“A lot of people think you can only make one payment to your credit card company each month,” Hardikopf added. “In fact, you can make as many payments as you want throughout the month.”
For example, if you plan to go out to dinner and see a movie and spend $75 that night, order a pizza and a movie at your home and save $50.
“Take the $50 and immediately pay off your credit card balance by $50,” Hardekopf advised. “Small payments can slowly, but surely, reduce your credit card debt.”