By Valencia Higuera
When used responsibly, credit cards are a useful addition to your wallet. They’re not only safer than cash, they can also build your credit rating. And some cards include rewards programs, helping you save money on future purchases.
But with the accessibility of credit, there’s also the risk of overuse and debt. So many people have fallen into the credit card trap, Americans owe a collective $1 trillion in credit card debt, according to the Federal Reserve.
And, a recent GOBankingRates survey found respondents have nearly $7,000 in credit card debt, on average.
Among the major reasons people are piling on more credit card debt:
<strong>–– Splurging on a wedding:</strong> A fairy-tale wedding can create a memorable day for couples and their guests. But some couples go overboard and end up spending more than they can afford on a wedding. The average cost of a wedding in the U.S. has skyrocketed to a new high of $35,329, according to The Knot 2016 Real Weddings Study.
“Putting most of your wedding expenses on a credit card is a bad idea, and what may not seem like much starts to add up very quickly and soon becomes overwhelming,” said Ogechi Igbokwe, a certified financial educator and founder of OneSavvyDollar, a website that helps students manage their personal finances. “It’s dangerous to start a wedding on credit because it shows you’re not planning adequately as a couple.”
Rather than feel the pressure to throw an impressive wedding, be realistic about what you can afford as a couple, create a budget and then stick with this budget.
“The wedding doesn’t have to be elaborate as long as both parties are present with their loved ones,” Igbokwe said.
<strong>–– Spending more to earn rewards:</strong> Credit card rewards programs are attractive and allow you to earn points, miles or cash back on every dollar spent. But the earning potential of a rewards program can also translate into more debt.
“Americans are battling more credit card debt because they are making more purchases with their cards,” said Alayna Pehrson, a digital marketing strategist at Best Company, a review website that ranks thousands of companies, including credit cards. “Many Americans reap rewards from using their credit cards, which encourages them to use the cards more frequently.”
That’s not to say rewards cards don’t have their benefits. But if you’re going to use a rewards credit card, make sure you pay your balances in full every month to avoid debt. Determine how much you can afford to put on the credit card each month, and then charge only what you can pay in full.
<strong>–– Striving to promote an image:</strong> Some image-conscious people are too concerned with how they come across to others, and they attempt to fit into a particular social class at the expense of their personal finances. Rather than live within their means, they use credit cards to finance a more exciting lifestyle.
“From what I’ve noticed, people are purchasing more luxury items with their credit cards (when they can’t afford to) because it promotes a desirable image,” Pehrson said.
The occasional splurge is OK, but spending more than you earn on a regular basis could leave you broke. So rather than overspend to keep up with the pack, change your mindset. The desire to maintain a certain image might do more harm than good in the long run. You could end up with out-of-control debt, a lower credit score and less money in the bank.
<strong>–– Suddenly losing a job:</strong> “Most people assume that credit card debt comes from living beyond your means, taking lavish trips and buying unneeded items,” said Sarah Hollenbeck, a personal finance and credit card expert at Credit Cards by Offers.com, a website helping consumers find the best credit cards. “But, if you’re unemployed for a while and living off your cards, debt can come from mundane things like groceries, gas and utility bills.”
In a perfect world, everyone would have six to 12 months of income tucked away for a rainy day. Because saving a large amount of money is challenging at some income levels, the slightest change in income or employment could trigger higher debt _ hence the importance of building a cash reserve.
<strong>–– Insufficient emergency savings:</strong> While on the topic of cash reserves, the lack of an emergency fund can also contribute to higher credit card debt. According to a 2017 GOBankingRates survey, 57 percent of Americans have less than $1,000 in a savings account.
Because you can’t predict a job loss or any other unexpected event for that matter, a car repair, home repair or emergency travel, take extra measures to ensure that you’re prepared for the unexpected. The more cash in the bank, the less you’ll need to rely on credit to keep your head above water.
Commit to saving money every week, even if it’s only $25. To drum up additional cash, reduce how much you spend on monthly subscriptions, entertainment and shopping, and then gradually increase your contributions to savings.
<strong>–– More access to credit cards:</strong> Another reason for higher credit card debt is that more people have access to lines of credit. And with more people swiping their credit cards, the average amount of debt per household rises.
“Major banks and credit card companies have become more lenient throughout the years when it comes to who is approved for a credit card,” Hollenbeck said. “Since some of the newly approved consumers are those with lower credit scores, the national debt continues to rise as more and more cardholders accumulate debt with higher interest rates.”
<strong>–– An increase in autopilot subscriptions:</strong> “Another contributor to debt in recent years are services and subscriptions that are on autopilot, that consumers either forget they have or have grown to neglect the cost of,” said Lindsay Sakraida, director of content marketing with DealNews, a comparison shopping website. “Unlike normal recurring bills of this nature, like electricity or cable, they’re very small in cost and consistent, so it’s easy to overlook them and ignore how they contribute to overall bills.”
To minimize credit card debt, limit the number of auto subscriptions on your credit cards, and periodically take stock of automatic monthly payments charged to your cards. You might be paying for services that you no longer need or use.
<strong>–– Living in a cashless society:</strong> A cashless society is convenient because you don’t have to worry about lost or stolen money, or being caught in a situation where you don’t have enough cash on hand for a purchase. But at the same time, this approach to spending makes it easier to disassociate the effect a purchase has on your financial stability, Sakraida said.
“When a credit card gives you the ability to buy almost anything, anytime, regardless of how much money is in your account, it becomes very easy to not even consider whether you should buy it,” she said.
To get out of a habit of swiping your card for any and every purchase, carry a credit card only when you intend to make a purchase with the card, and don’t wait for your statement to arrive to make a payment. If you charge an item to your credit card, immediately pay off the purchase to avoid debt and interest charges.
<strong>–– Getting sucked in by promotions:</strong> Credit card issuers know how to entice customers. Some credit cards offer 0 percent interest on balance transfers and purchases for a certain number of months, and other credit cards give sign-up bonuses when customers spend a certain amount within the first 90 days of opening an account.
But while these promotions are attractive, they can also encourage spending. Rather than get sucked into a promotion and spend unnecessarily, use a credit card only when you need something, and when you can afford to pay it off.
<strong>––Lack of financial knowledge:</strong> If you don’t know how to manage credit cards responsibly, there’s also a risk of making mistakes with your credit card, like charging up your accounts and carrying high balances from month to month. You might assume that as long as you make your minimum payment every month, you’re on the right track. But maxing out a credit card can lower your credit score.
Because the amount you owe typically makes up 30 percent of your credit score, maintaining good credit also involves minimizing revolving debt. As a rule of thumb, credit card balances should never exceed 30 percent of your credit limit.
Credit cards are convenient and flexible, but they can also get you into trouble if not used responsibly. Credit cards might be the preferred payment method for some Americans, but it doesn’t have to be your preferred method. So learn how to manage cards the right way, and get out of the habit of carrying high balances from month to month.