By Benjamin Ours
In 2018, US households accumulated an additional 26 billion dollars in credit card debt. Americans accumulate this over simple reasons such as misunderstanding credit, not making a budget, or emergencies and unforeseen expenses. It doesn't help that the APR, the rate which you accumulate interest is high. According to CNBC, It’s currently sitting at 17.73%. With all this against you, is credit card debt preventable? Yes, it is preventable, and the most efficient way to prevent credit card debt is literacy in your credit card statements, using balance transfers, and making a budget.
What is the minimum payment on your credit card statement? The minimum payment allows you to pay the minimum amount on your balance. However, According to creditcardinsider, credit card companies offer a grace period (as most do), it must give you at least 21 days from when you get your statement to pay before it starts charging interest on purchases. Especially if your a heavy spender, and are unaware of this, it will make you go into financial debt fast. An important tip to prevent this is to write down purchases so you don't go blind, and go unaware of your spending. Remember the minimum statement is not what you should pay, it's your full balance on time so it doesn't collect interest and lead you into piling more credit card debt. You should know and understand all parts of your credit card statement so you don't make a bad choice that could even affect your credit score and worse your life.
Another way you can prevent more credit card debt is a balance transfer. The idea is you transfer your credit card debt to another credit card, with a lower interest rate. It allows you to pay off the debt you have with no interest. However, you do have to pay a balance transfer fee of 3% of the debt you have. For example, if your debt is $3,000 then if you would have to pay 3% of it, which would cost you $90. You cant transfer to the same type of credit card; you have to open a new card from a different bank. If you don't pay your debt on time you will be charged interest like before. This will lead to more debt as you'll have to pay for both cards now. If you chose this option its recommended to have a plan before you to maximize this grace period. Most people pay the minimum payments on pay periods then when the grace period is over they wonder why they are in so much debt. This way is risky but with planning, you can get rid of your debt.
The last and most efficient way to prevent credit card debt is simply making a budget. For how easy it sounds many people find it hard to start. According to moneyunder30 As you’re working, make sure you list the amount, the interest, the term, your monthly payments, and the available credit limit for each debt. This will help you understand the full breadth of the situation, and give you solid numbers to work with when you create a budget (spoiler alert). Not only will a budget help you come to terms with where you are but help start to take action. You can start simply with a spreadsheet or look at mobile budgeting apps. I recommend the mint budgeting app as all your information is there and it's free. Also while creating a budget don’t forget to include an emergency fund for an unforeseen expense.If you use one or all of these tips, it will help you get on the track of preventing more debt and provide a happier you. What are you waiting to do, start saving!
Works Cited
Ashe-Edmunds, Sam. “Main Reasons People Get in Credit Card Debt.” Pocketsense, 10 Jan. 2019, pocketsense.com/main-reasons-people-credit-card-debt-4089.html.Cannon, Ellen, et al. “What Is a Balance Transfer, and Should I Do One?” NerdWallet, 6 June 2019, www.nerdwallet.com/blog/credit-cards/balance-transfer-3/.
“How Paying a Credit Card & Statements Work.” Credit Card Insider, www.creditcardinsider.com/learn/how-paying-a-credit-card-works/.
“It's All Coming Together.” Mint, www.mint.com/.
Leonhardt, Megan. “55% Of Americans with Credit Cards Have Debt-Here's How Much It Could Cost You.” CNBC, CNBC, 5 June 2019, www.cnbc.com/2019/05/17/55-percent-of-americans-have-credit-card-debt.html.
“What Is a Credit Card Interest Rate? What Does APR Mean?” Consumer Financial Protection Bureau, www.consumerfinance.gov/ask-cfpb/what-is-a-credit-card-interest-rate-what-does-apr-mean-en-44/.
I definitely think some options are better than others. For example, saving money is much easier than transferring the debt to different cards. But, as you mentioned, the first step in understanding and getting out of credit card debt is to understand the financial terms on the statement. Without this crucial first step, it will be almost impossible to understand the situation, and I can see how this is an easy way to fall into the trap of debt. I personally would prefer the most straightforward of creating a budget. This way, the money will already be there for me before the statement comes, and I wouldn't need to worry about acquiring the money to pay off the debt. With this method, late fees become almost nonexistent because the amount due will already be paid before the grace period expires.
ReplyDeleteI definitely agree with you that you can prevent credit card debt, especially with the fact that most people are only paying the minimum payment so that they don't get hit by a boat load of interest, but even with doing that you can see that it will take a long period of time to get rid of the debt on your account. And with that, you will also start to spend more money thinking "I have plenty to spend" when in reality you are spending all that you have available to you and this is all before you take into account the fact that you have your credit card payments that you have to pay off.
ReplyDeleteI also believe that credit card debt is preventable and it shocks me that so many Americans face this debt, maybe their high school never offered a personal finance class, or there parents never informed them of ways to prevent credit card debt. I agree that it's very preventable these days because we have budgeting apps, credit score commercials/adds, and the internet to give us tips. However, after the damage is done and you're already facing debt, it's very hard to get out of because of factors that keep building up like credit card fees, monthly interest, that could even cause someone to pay interest on the interest that they accure if their balance is so low. I feel grateful that our school has the opportunity to take personal finance and be aware of these issues so that we can take action before we get into bad financial situations.
ReplyDeleteI like the idea of using a budget because many people think about it but some think it's too easy or try to over complicate the process of making a budget. I agree that people went making a budget should use Mint because like you said it's free and pretty accessible to use, plus it's mobile. I like the tip of writing down payments you have made, I find this extremely helpful but also if you aren't a person to write things down something to consider is keeping all your receipts because this is more accurate plus it tells you exactly what you purchased and where. Your first idea of minimum payments and how most give a grace period. Some might find it helpful so they have time to pay it off but I find it worst than it means because someone can easily forget about a payment and the grace period may give them more time, but as a procrastinator I feel it will make me set it off until it's too late.
ReplyDeleteI definitely agree with the tools you put forth to prevent credit card debt, but I also feel as if paying your full balance after each month is the simplest and most effective way to stay out of credit card debt. Because many simply pay the minimum amount charged for a credit card each month, the massive 17% interest hits these people, and the road from there goes sharply uphill. According to credit card insider, paying the statement balance for your card each month is a massive money saver. Paying just the statement balance for 3 years, at $44 as shown in the chart above, one will only pay $1,584, whereas those who simply pay the minimum, lose $433 in the process, lost to interest, and take a whopping 7 years to pay it off. To conclude, I believe that the most important part of staying out of debt is financial literacy, demonstrating the importance of classes such as Economics and Personal Finance at Pewaukee High School.
ReplyDeleteI agree that credit card debt in the United States is a huge problem. People are spending money that they don’t have. However, everyone says that you shouldn’t spend money you don’t have. That’s easier said than actually done. When you think about it, the minimum wage in Wisconsin is $7.25 per hour. Say you work 40 hours every week, for the entire year, and you’re paid $7.25 per hour. Now let’s deduct taxes from that. Every year you’re making $15,080, you’re taxed at 12% for federal taxes. Now you’re down to $13,270.40. Now you’re taxed at 5.84% + $458 for state taxes. Currently you are at $12,037.41. Social security is taxed at 6.2%, so you now have $11,291.09. Then take away 1.45% for medicare. After all the taxes, you only have $11,127.37. If food costs roughly $200 per month, you can take away $2,400. Then say you rent an apartment for $300 per month. There goes another $3,600. Water bills and electrictricity cost roughly $200 per month I’m sure cost at least $2,000, and electricity bills probably cost at least $2,000 as well. After everything I’ve calculated, you are now down to $3,927.37. The annual insurance rate for a car is $664.81, for gas let’s say you spend roughly $2,000 on gas. You’re grand spending total for the year is $62.56 after all of those costs and taxes. When you don’t have enough money to begin with, it’s harder to say “just don’t spend money you don’t have.” And if you go to college, then you already have thousands of dollars in debt.
ReplyDeleteI am in definite agreement that you can easily prevent credit card debt yet is a huge problem due to the fact that everyone overspends what they don't have without paying anything back after the 21 day grace period. However, when payments are made on the massive amount of debt that is usually racked up by student loans and overpaying what you don't have, people are put under the illusion that they can go back to spending whatever they want, even if only a small amount of the debt has been paid off. This compounds the debt issue by continuing the illusion of safety even if you're still hanging in the jaws of debt. So financial literacy about how much money you actually have and how much you're paying each month, or if you're a really bad spender, weekly.
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ReplyDeleteNice job on the article, it was great and had depth. I really liked how you provided a solution that is reactive as well as proactive. Commonly advice is proactive, how to prevent it, but when the problem does not exist people don't search for solutions. When people are facing adversity, only then they explore solutions, your idea of credit card transfer really helps the majority of people hunting for the solution. One proactiv solution that neither yours or the latter credit card debt blog post mentioned is the alternate or substitute to credit cards: Debit cards. Debit cards give you the protection and convenience of a credit card without actually loaning anyone anybody money. Making your debit card the primary method of payment frees any tension of paying debt. If you need to make a purchase that you think is worthwhile or necessary but did not receive your paycheck yet(78% of workers in the US live paycheck to paycheck), you can still use your credit card but instead paying interest on all your purchases, you only pay credit on the items you bought after you ran out of money from your debit card.
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