This financial tool is the most stressful form of consumer debt
Americans have seen a lot of water flow under the bridge over the past two and a half years.
A global pandemic that has led to lockdowns restricting society. A major ground war in Eastern Europe. High inflation and long supply chain delays, which have affected everything from silicon chips to sand wedges.
With all eyes on the healthcare industry, the economy, and the geopolitical scene, it seems American consumers have lost at least one eye on credit card spending.
A new study by Anytime Estimate notes that 46% of Americans are now in credit card debt, with an average debt load of $6,093. Additionally, 66% of US credit cardholders with no credit card debt “could soon find themselves falling behind on card payments,” the study notes.
Therefore, it is not surprising that Americans rank credit card debt as the more form of stressful debt, before medical debt, student loan debt, mortgage debt, etc.
The study also found that 80% of credit card holders are also in some other form of debt, making it nearly impossible to pay for an emergency out of pocket. About 33% of cardholders say they couldn’t cover a $2,000 emergency without borrowing, and 43% say they depend on their credit card for essentials like housing, food and utilities.
There’s a reason why credit cards are so anxiety-inducing to so many financial consumers. They present more risk to lenders, who have a built-in insurance policy to cover their own financial risk.
“Credit card debt is much more stressful than a mortgage or car loan because of the interest rate,” said Money Crashers principal analyst Bill Hardekopf. “Car loans and home loans are secured, so the bank can repossess your car or house if you fail to pay one of these loans. But a credit card is a short-term loan. term which is not guaranteed; a bank cannot repossess the stereo system you may have purchased with your credit card.”
To compensate for this increased risk, cardholders ensure that the interest rate charged on a credit card loan is much higher.
“As a result, a credit card loan is extremely expensive compared to these other loans,” Hardekopf told TheStreet.
Unlike credit cards, mortgages and auto loans also have a finite structure that can increase consumer debt risk.
“There is a definitive timeline that will ultimately result in full ownership of the funded item,” said GenWealth Financial Advisors Financial Advisor Teresa Arrigo. “Credit cards design their minimum payment in such a way that the owner will probably never pay it back, especially if they continue to use it.”
Plus, credit card debt tends to pile up.
“If you use credit cards for day-to-day expenses, it’s easy to accidentally overspend and reach a point where you can’t pay when the bill comes in,” Arrigo told TheStreet. “Credit card debt accumulates faster when we try to own things we can’t afford when we’re in the moment.”
“Living beyond your means creates a snowball effect and can add up very quickly,” she added.
A way to reduce credit card risk
The first step to getting out of credit card debt is to stop using the credit card.
“Set a budget and only pay by debit card or cash,” Hardekopf said. “Store the cards so they’re not in your purse or wallet; this will remove the temptation to use them.
Another good idea is to pay as much as you can on your monthly card payments.
“Never pay only the minimum payment,” Hardekopf noted. “If you do, you will pay your debt for years.”
After paying your monthly bills, direct any excess money to your credit card bill and add credit card “micropayments” to your payment toolset.
“A lot of people think you can only make one payment to your credit card company each month,” Hardekopf added. “In fact, you can make as many payments as you want throughout the month.”
For example, if you plan to go out to dinner and go to the movies and you spend $75 that night, order pizza and a movie at home and save $50.
“Take that $50 and immediately pay off your credit card balance of $50,” Hardekopf advised. “Micropayments can slowly but surely reduce your credit card debt.”