Americans currently owe about $4.36 trillion in consumer debt. Most of this debt comes from credit cards, which are hard to pay off because of high-interest rates. So, why are Americans in so much debt, and why are credit cards a slippery slope?
How Does Credit Work?
After the industrial revolution, the invention of credit is probably the most impactful contribution to human history. Credit is the concept of purchasing a product now with the promise of paying for it later. You can use credit to pay for clothes, food, houses, and other goods and services. Essentially, credit allows the consumer to purchase virtually everything as long as they pay it off eventually.
What makes credit dangerous is the fact that it is an agreement between the buyer and lender. In modern American society, it's commonplace to use credit as a means for survival which means your survival depends on a lender. Lenders decide the terms for a credit agreement, and the buyer can either choose to agree to the terms or live without credit.
If you violate the terms of the credit agreement or fail to pay back what you owe, the lender can pursue collection. This is the process of using a third-party collection agency to contact the debtor on behalf of the lender to force the debtor to pay back what they owe. Collection agencies can be relentless and cause debtors immense stress and anxiety.
A credit card is a key that unlocks the door to a new line of credit. In most cases, credit card lenders charge high percentages of interest which can double or even triple the debt amount. The same rules apply to credit card debt as credit in general, including agreements and collection agencies.
Why People End Up in Credit Debt
One of the most obvious reasons people fall into credit card debt is that it enables them to outspend their earnings. Consumers are encouraged to spend, spend, spend to the degree that vastly outpaces their earnings. Unless you pay for everything in cash or with a debit card, there is virtually no limit on how much you could spend. If your paycheck isn't your spending limit, you must rely on restraint which consumer markets do not exactly cater to.
Another reason is accessibility. As the price of everyday goods and essential services continues to increase, many consumers cannot solve money problems with their paycheck alone. A blown transmission, pipe leak, termite infestation, or emergency medical procedure could put anyone in a challenging position. Putting emergency needs on a credit card can help make money stretch, but it can stretch too far over time.
Most credit cards offer cardholders the option to pay a minimum amount of their total balance. While this can help debtors avoid late fees and charges, the higher the balance, the more you pay for the minimum amount. Most minimum payments are barely enough to cover the interest, making paying off the credit card almost impossible.
While credit cards offer incentives that can be beneficial for travel or cash back, there are few good reasons to open more than one credit card. To avoid running through their line of credit, some people open more than one card. It can be challenging to keep track of what you owe if you have too many, which can snowball into many debts.
How To Prevent Credit Card Debt
While it's best to avoid credit cards altogether, it can be impossible to participate in the American economy without a line of credit. That said, below are some tips for managing credit card debt effectively.
- Avoid paying with credit when possible.
- Pay off credit cards until you get down to one or two, so the payments are easier to track.
- Avoid paying the minimum amount – pay as much as you can to avoid high interest.
- Rewards do not equal healthier spending. Don't sacrifice your credit score for rewards cards you cannot pay off!
- If you already have a credit card, don't get another one until you pay the first one-off.
Debt isn't completely avoidable, but it can be manageable. Contact Buchalter & Pelphrey Attorneys at Law to determine if you qualify for debt relief options like loan negotiation or bankruptcy.
Let our family help yours.