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Credit card debt in the United States crossed $1T for the for the first time in history this year. Sadly, this may only be the beginning of the historic rise. In the chart below, you will notice that the other peaks are closely correlated with recessions, both 2008 (the Great Recession) and 2020 (the Pandemic). Assuming a recession is imminent, as forecasted by economists, the level of credit card debt might continue to rise. The reason for the significant increase during recessions is generally due to job loss which results in people needing to rely on credit cards for living expenses.
How to Avoid It
Credit card debt is easier to avoid than escape, but that doesn't mean it's easy to avoid, just easier. What I mean is that once you have credit card debt, it's difficult to dig out of that hole for a variety of reasons and in hindsight it would have been easier just to avoid it. But how can you avoid it? There aren't many easy solutions, but below are a few options:
1) Don't use one: This isn't one that I personally recommend unless self-control is a significant problem for you. Credit cards provide convenience and typically rewards for using them which is why I still use mine regularly. In this option you are left with using cash, which seems borderline insane in today's world, or using your debit card.
2) Set a spending limit: Some credit cards, such as American Express, will allow you to establish a monthly spending limit. This will help ensure you can pay the monthly balance and don't overspend.
3) Set up automatic payments: Automatic payments will allow your credit card company to simply debit the full account balance from your checking account each month. This ensures that the full monthly balance is paid off, but it requires that you have sufficient funds in your checking account.
4) Spend intentionally: This is a key concept that I regularly discuss with clients. Spending money is all about making choices, but oftentimes we are making them unintentionally or without thought. For example, we may be subscribed to four streaming services that we rarely use or pay 30% more for DoorDash because we don't feel like driving to Chipotle.
How to Overcome It
As I mentioned earlier, credit card is a difficult hole to climb out of, but it can be done.
1) Stop hiding it: Due to a number of factors, primarily embarrassment, people often ignore the problem. This only compounds the problem, literally.
2) Move forward: I've found that clients in credit card debt are often focused on the past and what caused the credit card debt (young and dumb, health issue, job loss, etc.), but it's critical to focus on the present and plan for the future. Look forward, not backward!
3) Attack it: No one is coming to save you. There won't be a credit card "bailout," and you're not "too big to fail." Additionally, at the current credit card interest rate of 24%, it needs to be addressed and you will not find a better guaranteed investment than paying it off. This may feel impossible and overwhelming, but it can be done with a thoughtful plan, hard work, and consistency!
4) Get professional help: This isn't a shameless plug for Walk You To Wealth, and it may seem counterproductive to pay for help given the situation, but it is often a smart financial decision. The right financial planner can help you develop a plan and remain accountable, so that can pay off your debt significantly earlier than on your own. For example, paying off $20,000 of credit card debt six months earlier due to the help of a financial planner or coach saves you $1,800 in interest.
Ultimately, credit card debt can impact you financially, mentally, emotionally, and physically.
If you are in credit card debt and trying to find help, schedule a free introductory meeting below. For less than $5/day, Walk You To Wealth is the most affordable way to access professional help.
Disclaimer: The information in this post is provided for your convenience only and is not intended to be treated as financial, investment, tax, or other advice. The information is intended to be educational and is not tailored to the investment needs of any specific individual. It is also not intended to be relied upon as a forecast and is not an offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are those of the author. Reliance upon the guidance and information in this presentation is at the sole discretion of the individual.
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