It is shocking to observe that citizens of the United States are struggling to swim in the pool of credit.
According to the statistics recorded by Experian’s annual study on the state of credit and debt in America, “The average American has a credit balance of $6,375, increase in nearly 3% from 2017”.
Credit card users are growing at an alarming rate. This has also increased the debt load in the past few years. The debate that rests in front of the average American is that is it healthy for the nation to remain in such a perplexing situation? What are the ways to reduce credit card debt? We will try to answer your queries in this article.
Are there any psychological reasons behind the rise of credit card debt?
If you use your credit card responsibly, it can be a proven valuable financial instrument. Credit cards are much easier to carry and use compared to cash, and it’ll also allow you to make smoother transitions over time.
However, using credit cards might be dangerous due to a number of psychological reasons. Most of the time people are willing to spend more money on an identical product when they use credit cards rather than using cash. When you compare cash and credit randomly on the basis of spending, people often spend more with credit.
Is there any logical reason behind this behavior? Yes. Credit cards not only help you to make payments easily, but also act as catalyst and boost your desire to spend more. Also, with a decent credit limit, you can get a benchmark against which you can compare the prices of the commodities. This way a good or high credit limit also lure you to spend more than what you practically need to spend.
The actual point is, we have a weird and strong psychological effect upon us when we start using credit cards. And that psychological effect is the main reason for increasing credit card bills.
A study conducted by “Drazen Prelec” and “Duncan Simester” from the Massachusetts Institute of Technology’s Sloan School of Management revealed the effect of cash and credit cards on spending. They practically conducted a survey on students and asked them to bid on Boston Celtics basketball game tickets. There were two groups and they were asked to buy the tickets using cash and credit card alternately. It was found that the group of students who would make the payment with a card, bid twice the number of the amount the cash group bid.
In another recent online survey conducted by Harris Poll, more than 2,000 adult Americans were asked about credit card debt and regret. They were asked whether they’d be willing to buy things by going into debt and if they are agree to do that, how come they find the motivation to pay it all off.
This is what the result shows about the psychology of debt in Americans:
- About 86% of the Americans regretted about having debts on credit cards. But in this situation also, 71% of them are willing to go into further debt to meet up certain expenses.
- More than 20% of the Americans with family admitted that they didn’t want to carry a huge debt burden like their family, and they are truly regretted about this.
- 25% of the Americans feel that they might get motivated to pay off credit card debt and increase their credit score. By doing so, they would become eligible to get bigger loans for buying a house or car.
Despite having so many debts on their shoulder, people are still incurring debts. Is it the fear to tackle the truth, or something else?
Is America taking credit card dues too casually?
The average American’s credit debt grew at 3% last year, resulting in the average credit balance of $6,354. The average interest rate is 15.5%, which is 300 up from the basis points over the past 5 years.
The cost of credit card debt is still increasing as consumers didn’t stop borrowing yet. As a result, the total revolving debt is measured at $1.04 trillion, and credit card borrowers made payments of $104 billion as credit card interest and fees over the last twelve months. The number is overwhelming, up 11% from 2017, and 35% over the last five years.
This has also impacted other financial sectors and led to a considerable increase in retail cards, mortgage debts, and overall debt, revealing the negligence of the general population on credit cards and other dues.
What are the steps you can take to reduce credit card dues?
How to eliminate debt with a disciplined, structured approach? Is it really possible? The answer would be yes, if you follow several simple steps.
You can remain financially wealthy only when you reduce credit card debt. It appears to be a challenging process in the beginning but not when you develop the habit of following these steps to reduce the dues. Consider it a norm which will take you out from misery.
1. Calculate the exact amount of debt
Many people have a casual habit of not calculating the exact amount of debt owed to the creditors. Enlist all your credit card bills and take into account the exact amount of your outstanding debt. It is important to have an exact figure of your debt as it will help you select a suitable debt payoff strategy.
2. Keep track of your costs
Write down your expenses from petty to preliminary expense, entertainment expense, meals, etc. If you clearly keep a record of all your expenses, it will make your budget stronger. To get a brief idea of your monthly spending, study your previous year’s worth of credit card bills and bank statements. You can take the help of online budgeting software to keep track of your costs.
3. Plan a budget
It becomes hard to adjust your lifestyle little too often but a slight adjustment made on your expenses can add up to big savings. For example, cutting down on expensive meals once in a while or replacing expensive purchases with a cheaper one can impact your budget to a large extent.
Write down three ways in which you can cut down on your expense and divide your monthly budget into weekly ones so that you can get a track of what’s going out of your pocket.
4. Select your debt payoff strategy
You can use the snowball method to reduce debt. It clears the debt, beginning from the smallest to the largest, thus creating a momentum similar to the snowball effect. What you need to do is, make minimum payments on all accounts and add a little more towards the smallest debt amount. Repeat the process till each debt is paid fully.
Other debt payoff strategies include the debt avalanche method, under which the debtor makes the minimum payment on all the credit card accounts and pays a little more towards the highest interest debt. As the process continues, the monthly amount of your debt payment will go on increasing.
Select the strategy which you think is right. After all, you are your best judge.
5. Work on improving the interest rates
If you have to negotiate with your creditors, use your soft skills to the best advantage while communicating with the negotiator about reducing interest rates. Even if the interest rate is lowered by a percentage or two, you are saving hundreds as you pay off debts.
Remember that your credit score has a vital role to play in lowering rates but that’s not the only factor. So the action plan that goes out to you is to call up the credit card companies and politely request them to lower the interest rate. State a solid reason behind lowering it.
6. Create solid goals to stay focused
If the debt is paid on due time, then it can open doors for you to spend on other things like vacation trips, gadgets, a new set of clothes, and host of other things. This can happen only if you are a determined person who believes in creating concrete goals. Therefore, make a habit of writing down your goals so that it is clear for you to make the future dreams happen in reality.
7. Watch your progress
If you want to refrain from excessive spending, it’s important to go through your expense history from time to time. Make an excel sheet and review the section properly to keep a constant update of your ongoing credit activity. Put reminders on your calendar to check the status of your financial situation. Track your progress intelligently. It will make you confident and grounded in your financial matters.
A word of wisdom…
It might seem like a great idea to close your card once it is paid off. But, this is not at all the best way. Your credit score partly depends on your credit utilization ratio. If you close the card, there will be less credit in your name. This will affect your debt utilization ratio and it’ll gradually be increased, which will hurt you in the end.
On the other hand, closing a credit card with a long credit history may also affect your score badly. So, keep your credit card open, it’ll improve your score, too.
Still wondering about how to eliminate credit debt? Following these simple steps can make a huge difference. It will encourage you to take more credit cards in the future which you can happily use it for your benefit.