It’s easy to throw financial reasoning out the window when there’s a credit card burning a hole in your wallet — and if you’re like most Americans, you have one. In fact, if you’re like most Americans, you have about 2.2 credit cards (averages are crazy things) with a balance of around $4,500.
Americans have a spotty history with credit cards, and a relatively high average balance isn’t even half the picture. As a nation, we’re addicted to credit. Some of us have fallen on hard economic times and have been forced to use a credit card to cover the cost of living, but some (many) of us are just addicted to spending and spend beyond our means.
Whatever the case, though, most of us have more credit card debt than we care to carry over from month to month, accumulating interest at a ridiculous rate. According to the Federal Reserve, American households spend 9.9 percent of their disposable income to service debt. This is down from a pre-crisis level of more than 13 percent but still enormously high.
Taking control of credit card debt is all about information. Here are a few steps to guide you along.
1. Knowledge is half the battle
It’s useful to simply admit that creating and adhering to a budget is hard. As much as we would like to only spend “x” dollars on pizza a month, we usually end up spending more than “x,” and as much as we’d like to save “y,” we usually end up saving more than “y.” Between compulsive buying and unforeseen expenses, we’re pretty much doomed to spending more than we should.
Case in point, the U.S. Bureau of Economic Analysis calculated a personal saving rate at 3.9 percent in December. Between retirement and a rainy day fund, this is well below what most economists would recommend people should be saving. What’s more, in a way that may be described as “typically American” at this point, personal consumption expenditures are increasing faster than disposable personal income. All the while, revolving credit outstanding — that is, credit card debt — is increasing, climbing 6.2 percent in 2013.
It’s hard to apply data for the nation at large to anyone’s personal financial situation, but the trend can still serve as a guide. Americans have a history of bad financial behavior, both on Wall Street and Main Street, and it may be easier to find yourself in the red than you think.
This is why the first step to preventing debt from taking over your life — or, the first step toward slaying the debt monster that currently haunts you — is to gather all of your credit information, make sure its up to date, and stay up to date with it. This means knowing how much you owe on each of your cards, what your utilization is (how much you owe relative to your credit limit), what the interest rates are, what your minimum payments are, and when you have to pay them.
Armed with this knowledge, you are ready to do battle with credit card debt.
Pretty much the last thing you want to do is play games with your credit cards (the various financial institutions and credit bureaus that watch over the system are not easily amused), but many credit cards are set up like games. The problem with gamifying credit is that games are usually played for the sake of playing, whereas money shouldn’t be spent for the sake of spending, no matter how many bonus points you get.
Remember that the issuers of credit cards make most of their money from charging you fees and interest. They make more money when users are as reckless as they can be with a credit card — carrying a large balance and paying late, which can raise interest rates — without actually defaulting. Credit card companies would prefer you never touch cash again and use your card for every purchase you make, large or small, so they can collect fees from merchants. And they incentivize this behavior by rewarding you for using the card.
While you should absolutely take advantage of any rewards your card offers, don’t let the rewards program be an excuse to increase spending. Another reason to keep credit card spending in check is because over-utilizing the card, using a high percentage of your available credit, can have a negative impact on your credit score.
At the same time, don’t let this warning be an excuse to abandon your credit card altogether. A credit card can be a valuable tool if used properly, and you’ll need to let some amount of spending go to statement if you want to build up a good credit history. The golden range for utilization is more than zero but less than 30 percent.
3. Now the hard part: budgeting
Armed with information about what you already owe and how to use your credit cards efficiently in the meantime, the next step is to actually sit down and figure out how you’re going to pay down your debt. This phase is really all about discipline and, unfortunately, making some sacrifices. This phase is also all about information.
In order to determine if you are spending too much, you need to know how much you are spending and where. You can use your credit card statements for some insight into your own spending habits. A practical step to take is to add up all of your spending on non-essentials and determine whether this is a level of spending you are really comfortable with. If you want to reduce your spending on non-essentials, you can try to alter your behavior by shifting to cash for small purchases and using the credit card exclusively for larger purchases and bills.
For many people, acquiring and spending cash will make them more aware of their spending than simply swiping a card.