Whether you realize it or not, America runs on credit. Earlier this year, according to data from the Federal Reserve, the aggregate amount of credit card debt consumers held topped $1 trillion, joining student loan debt and auto loan debt atop the $1 trillion mark. At last check, aggregate credit card debt stood at $1.027 trillion, which is a fresh all-time high, surpassing the previous record set before the Great Recession.
It's not hard to understand why credit cards play such a vital role in the lives of everyday Americans. According to the St. Louis Federal Reserve's personal saving rate data from July, the average American is socking away just 3.5% of his or her income, which is well below the 10% to 15% most financial advisors recommend workers save. It's also less than a third of what the average American was saving 50 years ago. This lack of savings means Americans have little choice but to turn to their plastic to save the day should an emergency arise.
29 million card-carrying Americans open up their wallets
While credit cards can be a saving grace for those who use them wisely, they can also be a nightmare for folks who don't take the responsibility of using credit seriously. ValuePenguin's September 2017 data pegs the average American's household debt at $5,700. But it's far worse for households that carry debt from month to month, incurring interest in the process. ValuePenguin pegs this household figure at $16,048, or nearly triple that of the average American household.
So how many people are carrying debt on a month-to-month basis? A newly released report from CreditCards.com showed that 28% of all card-carrying Americans are lugging around debt on a month-to-month basis. What's worse, 43% of those who are carrying debt, which works out to about 29 million people, have been carrying credit card debt and allowing it to accrue interest for at least the past two years.
These 29 million people probably aren't happy campers right now, because according to a Sept. 20 press release from CreditCards.com, the national average annual percentage rate (APR) hit 16.15%, an all-time record high. Even as the federal funds target rate, and thus interest rates, remains relatively low, credit card companies have increased their rates to boost profits and shield themselves from consumer delinquencies. This suggests that the average household carrying debt (using ValuePenguin's statistic) could be paying over $2,500 in interest on their debt each year. This could be what an impending disaster looks like for lenders, card-carrying Americans, and the U.S. economy.
Two things credit card-carrying Americans should do right now
There are two things card-carrying consumers can do right now to better their situation and hopefully reduce their reliance on credit cards.
Save more by formulating a budget
First, more households need to be willing to adopt and stick to a detailed budget. A 2013 Gallup poll found that just 32% of households were utilizing a detailed monthly budget, which certainly helps explain why personal saving rates are near all-time lows. Without an adequate amount of money being saved for emergencies and retirement, even minor hiccups can become financial disasters for the average American.
Formulating a household budget is especially easy these days, considering that everything can be done by inputting income and expenses online. That means no more math on your end. In some instances, budgeting software can even help draw out a saving game plan if you know how much you want to sock away each week, month, or year.
By far, the most challenging aspect of a budget is actually sticking to it once it's been formulated. Here are a few helpful hints that should keep you on track:
- Set up automatic withdrawals on a weekly, bi-weekly, or monthly basis, from your checking account to a savings or investment account. Automatic withdrawals remove the common "I forgot" excuse from the equation, and they keep you honest to your budget with the understanding that a specified amount of money is coming out of your checking account on a certain day each week or month.
- Get everyone in your household involved with budgeting. The more you surround yourself with people who share similar goals, the better chance you have of sticking to your own budget.
- Consider using cash instead of your credit card when making any discretionary purchases. Credit is an intangible form of money, whereas handing over cash bills from your wallet instantly causes a tangible reduction in value. This should help reduce the urge to impulse buy and will make you think twice before making any purchases.
- Set "SMART" budgeting goals. This acronym stands for Specific, Measurable, Achievable, Realistic, and Time-based. In other words, you want to be able to optimally adjust your saving and spending habits, and the best way to do that is to create a step-like series of goals that'll help you achieve this optimal level of saving.
Be smarter with your credit card usage
Card-carrying consumers also need to be smarter with how they use their credit cards. Remember, APRs are at an all-time high, meaning anything you put on a credit card that doesn't get immediately paid off is likely to incur more interest now than at any point in the past.
Arguably the most important question to ask yourself before putting a charge on your credit card is: Do I need this? Ask yourself if the good or service in question is a necessity. There's a big difference between putting $70 on your credit card to pay your trash bill for the next three months and opening a department-store credit card to save $10 on a $100 purchase. Necessities should always take priority over discretionary purchases -- and as noted, you should consider using cash instead of credit to pay for discretionary items, to reduce impulse purchases.
Also, take the time to calculate how much a good or service will cost if you don't pay it off immediately. While a sale on a smartphone or TV might look enticing up front, it may not be so enticing after you've paid interest on your purchase at 16%, 19%, or 24%, for six months, a year, or longer. Weigh your payment options for large purchases and don't always assume that your credit card is the best choice.
With credit card APRs soaring, it's time for consumers to wake up and change their saving and spending habits. Otherwise, we could be staring a possible credit-induced recession in the face once again.