The Federal Reserve Bank of New York released data that shows, for the first time ever, American credit card debt has surpassed $1 trillion. This proves now more than ever it is imperative to understand how to responsibly manage credit. Credit cards offer convenience, but if not handled well they can become a pathway to financial stress.
According to Bankrate.com, the average credit card charges a near-record 20.53% interest rate. Rising interest rates make this more complicated, forcing consumers to stretch their dollars. Modern technology has made it convenient to shop for almost anything instantaneously using a credit card, but it is important to keep track of your spending, stay within budget, and pay your credit card balances in full each month.
With such increased access to money via mobile technology, younger generations face an increased risk of overusing their credit cards. Cards are oftentimes connected to digital wallets, making spending money even more seamless. That seamlessness, however, can lead to increased financial stress, which can significantly affect one’s health and well-being.
Prolonged financial stress often leads to increased anxiety, depression, and makes managing daily stressors difficult. A survey by BrightPlan reports that 92% of employees are stressed about their financial situation, with inflation being the number one cause. The survey also shares that 85% of people surveyed have debt and 48% have more debt than is manageable.
The good news? In that same study, younger workers say they are making financial adjustments, with 85% of Millennials reporting they have made cutbacks, followed by Gen Z with 80%, and 77% of Gen X and 63% of Baby Boomers reporting changing their habits.
It’s clear Americans are reassessing their finances and making changes to put themselves in a better position.
Here are some useful tips to manage credit card debt:
- Budgeting: To establish a budget, make sure to list all expenses and income. This will allow you to differentiate between needs and wants.
- Tracking Expenses: Review your account daily to ensure all bills and purchases are accurate.
- Paying in Full: Whenever possible, pay off your credit card balance in full every month. This avoids interest charges. If you are unable to do so, plan to pay more than the minimum amount required.
- Emergency Fund: Build an emergency fund to avoid relying on credit cards for unexpected expenses. Your emergency fund should cover 3-6 months of essential living expenses.
- Interest Rates: Prioritize paying off higher-interest cards first.
- Credit Score: Responsible management can improve your score, which can lead to better conditions on loans and mortgages. Utilize websites like annualcreditreport.com to view all three of your credit reports annually, for free.
Credit cards can be a great tool for rewards, and cash back when used within a person’s spending plan. Rewards credit cards typically offer 1% to 5% cash back on most purchases, often accompanied with an initial rewards bonus.
Keep in mind, if you are carrying over a month-to-month balance, the perks of cash back and rewards credit cards no longer become a win, win. It is best to pay your card in full each month so as not to pay interest and keep your credit score in good standing.
By empowering and educating individuals on topics like utilizing credit wisely, establishing a budget, and how to reduce one's debt, we can help alleviate financial stress and encourage better financial habits to live a financially smart life and thrive.