Whether you want to admit it or not, the United States is a nation that runs on plastic. Credit cards are convenient, and many these days offer rewards to cardholders as a perk to keep them loyal, making plastic the preferred choice for quite a few consumers (including yours truly).
According to data from the Federal Reserve Bank of Boston between 2011 and 2012, 72.1% of all consumers had at least one credit card. Based on Census Bureau data from 2014, this would work out to about 167 million American adults walking around with at least one credit card in their wallet.
When averaged across all adult Americans, the average American had 2.6 credit cards in their wallet as of 2014. This was actually down about 10% from the mean of 2.9 per American that was noted in 2004, 2006, and 2008. The findings also showed that close to a fifth of credit card holders (18%) have three or four cards, 9% had five or six, and 7% had seven or more credit cards in 2014.
Average debt per household -- how do you compare?
But just because the mean number of credit cards that Americans have in their wallet appears to be falling, it doesn't mean that average credit debt per household is as well. The 2015 Credit Card Debt Study, which was released by CardHub earlier this month, shows that average household credit card debt is once again on the rise.
Based on CardHub's data, the average credit card debt per household in the U.S. hit $7,879 in the fourth quarter of 2015, its highest level since the first quarter of 2009 ($7,887) and very close to the point at which credit delinquencies and charge-offs proved unsustainable during the Great Recession. In fact, CardHub pinpoints U.S. households as being an average of less than $500 away from unsustainable credit debt levels. Now think about where you or your family's current credit card debt situation stands next to that $7,879 average per household.
As you can see from the chart above, credit card debt often drops during the first quarter every year as consumers use federal tax refunds to pay down debt. In an average year about 80% of taxpayers will receive refunds, so this tends to be a trend you can almost count on each year. However, the second half of the year, which features a number of retail holidays and events, including back-to-school shopping and Christmas, has a tendency to cancel out what was paid off during the first half of the year. In 2015, the fourth-quarter debt buildup of $52.4 billion was the highest since the Great Recession.
If there is good news here, it's that quarterly charge-off rates for credit issuers remain near their historic lows. For now it would appear that American households are absorbing higher credit card debt levels with ease thanks to a growing U.S. economy and very favorable lending rates on account of an accommodative Federal Reserve.
But as the report points out, it also appears that consumers' poor spending habits may be rearing their ugly head once more.
How to avoid becoming an unfavorable credit card statistic
At some point it seems likely that credit delinquencies are going to rise. It's unclear what "X factor" will cause this to happen (perhaps a recession or a series of Federal Reserve rate hikes), but it's in credit card holders' best interests to practice smart spending habits from here on out so they don't become unfavorable credit card statistics.
The first step for all credit card-toting Americans is to formulate a budget and stick to it. Chances are that if you asked consumers how much money they bring in each month they'd have a pretty good idea. However, ask these same consumers where their money goes once it's deposited into their bank account and you're liable to get a number of shoulder shrugs. Formulating a budget allows consumers to completely understand their cash flow, and understanding your cash flow is the first step to saving more and paying down potentially crippling levels of debt. Best of all, reviewing your budget won't take but 30 minutes a month, so it really is as easy as one, two, three!
Secondly, understand the importance of maintaining a good credit score. Lenders usually base your interest rate off of your credit score, which is in turn predominantly derived from your payment history and credit utilization, and to a smaller degree on your length of credit history, credit mix, and new accounts opened. Understanding how your credit score can affect the interest rate you'll pay can be a strong motivator to develop good credit card habits.
Third, ensure that you have sufficient funds to cover your monthly expenses should an emergency arise instead of having to turn to your plastic. Emergencies can take many shapes, such as a surprise medical bill or even losing your job. While there's no concrete number that's correct, I personally advocate having an emergency fund that could cover six months' worth of basic expenses (mortgage, food, electricity, and so on) should an emergency arise. Plus, you can always consider using excess cash in an emergency fund to pay down some, or all, of your debt.
Fourth, keep in mind that you always have options available to you. If you have a good payment history and credit score, consider asking your lenders for a reduction in your interest rate. You may wind up hearing "No," but competition among credit lenders can be fierce. It's just as possible you could indeed wind up with a lowered interest rate, which saves you money on debt carried over to the next month.
Along those same lines, if you find that your debt load is unsustainable, consider talking it over with your creditors instead of crawling into the fetal position under the sheets. Your lenders would very much prefer not to send your loans to a collection agency, because that means having to share a percentage of whatever is collected with the collection agency. More often than not, your lenders will be willing to work out a payment plan with you.
The last idea involves consolidating your debt to a 0% APR or low-interest rate credit card. Although doing so could adversely impact your credit score (it may negatively impact your credit utilization rate), lumping your debt on a 0% APR or low-interest card should allow you to tackle your remaining debt at a quicker rate.
Don't allow yourself to become an unfavorable credit statistic. Take action today to become a smart credit card user.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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