Are Consumers too Comfortable with Credit Card Debt?
The Federal Reserve recently reported that consumer borrowing in the United States rose less than expected in June. Loans for cars and college tuition bills increased by $16.5 billion while the component containing credit card spending decreased by $2.7 billion. Despite the decline in revolving credit, many Americans are still failing to use credit cards in a responsible manner.
A new online poll from the National Foundation for Credit Counseling finds that nearly one in five Americans see nothing wrong with carrying credit card debt over from month to month. When asked to describe their attitude toward debt, 18 percent of those surveyed said carrying a balance over to the next month is a responsible way to manage his or her finances. Sixty-one percent believe paying off the debt each month is the best strategy, while 21 percent say they do not use credit cards.
“This data suggests that not only are many Americans using credit cards to fund a lifestyle their income can’t support, but they are comfortable doing so,” Gail Cunningham, a spokesperson for the NFCC, said in a press release.
One positive is that consumers appear to be relying less on credit cards. The average amount of credit card debt per household fell to $6,591 in the first quarter compared to almost $7,000 in the previous quarter, according to Cardhub.com. Last year, the average per household increased in every quarter. The default rate on credit cards is also at its lowest level since 2006.
The NFCC believes consumers should be aware of the following consequences associated with ongoing credit card debt:
- Interest on a credit card is typically calculated on an average daily balance. For those who carry a balance over from the previous cycle, interest is not only charged on the unpaid balance but on any new purchases added to the balance.
- With interest added onto the balance month after month, consumers end up paying interest on the interest.
- Carrying a balance has the potential to negatively impact a person’s debt-to-credit ratio, one of the main components of credit scores.
- A higher balance decreases the amount of credit available for future purchases.
While some people may advocate not using credit cards in order to avoid the pitfalls of debt, this too has negative consequences. Not using credit cards may reduce the number of transactions that appear on your credit report, which could make your credit history look worse and lower your credit score. Even if consumers do not need a loan to make a purchase, credit reports are often used by insurance companies to help determine premiums.
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