The increased usage of credit cards and lower rates of repayment have led the average household to just under what analysts call the “tipping point” of financial sustainability. By the end of 2016, some analysts predict that the overall credit debt total will exceed $1 trillion dollars nationwide.
“When you are buying stuff that you really don’t know how to pay for, that is a really bad thing to do,” said Dan Danford, principal and CEO of Family Investment Center. “It’s the thoughtful use of credit cards that is good. It’s the unthoughtful use of credit cards that isn’t so good.”
A 2016 CardHub study found that Americans paid down roughly $26.8 billion in credit card debt during the first quarter of 2016, the smallest first-quarter amount since 2008. As of 2015, credit card debt has reached $917.7 billion, an increase of $71 billion from the previous year.
The average indebted household’s balance was just over $7,500 according to the study, $831 below what the study calls the “tipping point” of financial sustainability. According to credit reporting agency TransUnion, the average Missouri resident’s credit debt totals $5,431.
“Many of us, especially in the financial world, think that if they don’t pay attention to it, if they don’t open the envelope, that it won’t exist,” said Tasha Bishop, director of strategic alliance and business development with Apprisen. “But the longer you wait, the worse the situation is going to get, especially with credit cards. You are only adding to your balance and only hurting yourself in the long run.”
Psychologically, it can be easier for people to pay using a credit card because no paper money is involved, Danford said. A Dun & Bradstreet study found that people spend an average of 12 to 18 percent more when using a credit card instead of cash.
“I think that’s one of the traps. It’s almost too easy to use a credit card,” Danford said. “You don’t have to think of the consequences.”
According to 2015 data from Experian, the average American had 2.24 credit cards, up from 2.18 in 2014. Multiple credit cards can create the opportunity for more debt, but they can be used responsibly, Danford said.
“People will have some debt and someone will send them a card that says they’ll let them transfer the balance and we won’t charge you interest on it. They do that and then six months later, they are looking for another card that won’t charge them interest,” he said. “But that doesn’t get to the root of the problem. The root of the problem is that you are using the card for stuff that you can’t afford.”
A lack of emergency funds also can contribute to credit card debt, Bishop said. A recent Bankrate.com study found that 63 percent of Americans couldn’t afford a $500 to $1,000 unexpected expense without reducing other expenses, borrowing from family or friends, or using a credit card.
“Any little thing that pops up like a car repair or a medical bill, those things are really starting a cycle of debt for a lot of people because there’s not a culture of savings in this country and individuals aren’t able or willing to build an emergency savings,” Bishop said. “Use of credit cards in emergency situations is a major problem.”
Using a credit card only as a substitute for cash can help prevent uncontrolled debt accumulation, Danford said. Approximately 35 percent of credit card users, called “convenience users,” don’t carry a balance, paying off their total monthly.
“Go into it with the attitude that this is just like a utility bill or something else. You are going to spend money on it, but you are going to pay it off in full every month,” Bishop said.
Overspending, not understanding debt and credit usage, and the increasing ease in access to credit also have contributed to the overall debt, Bishop said.
“I think a lot of people don’t really read or understand the terms of their card. There is a lot of lack of understanding of interest and how interest accrues and how that’s going to affect their personal balances,” she said. “People don’t take the time to understand and make sure they are managing it properly.”
Using a credit card for a larger purchase can be beneficial if it will result in saving money and is a necessary expense, Danford said. Purchasing a needed item on sale and paying it off over several months still can result in a savings and help build credit, he said.
“That’s not a bad deal,” he said. “It really depends on how you use the card on whether it’s a good thing or a bad thing.”
Bishop recommends first-time users start with a secured card to “get into the rhythm of managing credit and understanding how it works.”
“Don’t be scared of credit. There are a lot of dangers to irresponsible credit use, but don’t be scared of it,” she said. “... Once you have those good habits ingrained, then you can take advantage of some of those reward cards and use credit to your advantage.”
Danford anticipates that the usage of credit cards will continue to increase, and stresses that, when used responsibly, credit cards can be beneficial.
“I think the wise use of credit is always important,” he said. “It’s the same with mortgages and bank loans. You can use it wisely and it can actually help your situation, or you can use it badly and it can hurt your situation. The key to the whole thing is being smart when you use credit.”