The Truth About American Credit Card Debt

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The Truth About American Credit Card Debt

Americans are stuck on debt like gum stuck to a city sidewalk: According to the Federal Reserve, Americans are rapidly approaching a whopping one trillion in credit card debt. And the numbers don’t lie: Just step into a shopping mall on a Saturday afternoon and stores brim with shoppers loading up on items they probably – or, almost certainly – don’t need.

While credit cards need not be completely anathematized, caveats are in order. Myths about the value of credit cards are rampant and lead consumers even deeper into an already stifling debt problem.

Here, we’re debunking some of the most common myths about credit card use. We share tips about how to reframe your thinking to curb spending and promote financial health.

I’m Okay As Long As I Don’t Carry A Balance

Generally, yes – this is a good practice. However, as always, there is a gray area: Studies show that one in three Americans are behind on their bills. And the average credit card balance exceeds $6,500.

Needless to say, the odds are stacked against you. While this does not mean you should cut up your cards, be aware of this issue and know that no one is immune to it.

I Just can’t Turn Down the Reward Opportunities

We all love a good deal, but keep in mind that if something sounds too good to be true, it just might be.

Airline Miles

Credit cards that offer the accumulation of airline miles in exchange for spending generally carry an annual fee of between $70 and $100. Not to mention, you will need to spend close to $8,000 on the card each year in order to accumulate enough points for a free round trip ticket. At this point, you (arguably) might as well purchase the ticket out-of-pocket. When applying for a card that offers points for airline miles, read the fine print and consider the tradeoffs. Would it make more sense to simply budget some of your income each month for a trip instead of racking up credit card charges?

Cash Back

Not only do you have to spend thousands each year in order to earn a cash back award of $100, but cash back is actually not cash at all: It is a credit applied to your account. And the award is generally a fraction of what you will pay in interest on your credit card debt.

Rewards

Are discounts and rewards really saving you money? If you think this is true, think again. Even a 15% off award at a vendor of your choice may lead to unnecessary spending. For example, imagine you head to your favorite store to redeem your reward, and find out they are having a sale. You may end up spending far more than you budgeted simply because you had a discount you felt compelled to use.

How Else will I keep a Good Credit Score?

A high credit score equals financial health and wealth, right?

Actually, no. Not really.

A high FICO score is not always an indicator of financial health. Rather, it measures your debt amount, how much you use, and how quickly you pay it down. While this is not inherently negative, it does not mean you are building wealth.

As such, having a credit card simply for the sake of raising that FICO score pales in comparison to the negatives that may spring from excessive spending.

What to do If You’re Already in Trouble

If you’re already steeped in credit card debt, rest assured that this is not the end: The first critical step is recognizing the problem, then making positive strides toward financial freedom. It will take effort, but it is possible.

  • Stop using your credit cards. Break your negative spending cycle by cutting up – or canceling – those cards. Simply knowing that they are unavailable will make a world of difference as it will eliminate the temptation to spend. This will help you shift your lifestyle from reckless spending to budgeting and rationing.
  • Develop a payoff plan. Sit down and work out a plan. This will help you regain control of your finances so you are not living at the mercy of your monthly payments. It will also reduce the snowball of debt and thus the amounts of interest you end up paying.
  • Stick to your goals. Your debt problem didn’t happen overnight, so it will not resolve overnight, either. The journey to financial freedom is a long game: It demands time, commitment, discipline, and effort. Celebrate small victories and find an accountability partner to help you keep your spirits up when you are tempted to slide back into old habits.

Committing to Change

Taking small steps will help you regain financial peace and independence in the long term. Create a plan, commit to change, and take small steps: The results will be worth it.