Tim Whistler's credit card debt gradually grew to about $8,000. The cost of everyday products rose, his monthly rent jumped from $1,000 to $1,400 over four years, and then last year, his son was born, adding entirely new categories of expenses. Like a growing number of Americans, his credit card debt now exceeds his savings.
“Emotionally, the level of stress I'm feeling with my low credit score, high bills, and mountain of debt has definitely taken a toll on me,” Wissler, 41, said.
He's not alone at all: More than a third of American households (36%) say they carry more credit card debt month to month than they have in emergency savings funds, according to a new study by Bankrate. This is the highest percentage since the start of voting in 2011.
The survey found that this is most likely the case for Gen X and Millennial consumers. Meanwhile, baby boomers were more likely to say their emergency savings exceed their credit card debt.
“60% of American households living paycheck to paycheck are really feeling it, and necessities rather than discretionary items are increasingly being put on credit cards,” Greg McBride, chief financial analyst at Bankrate, told MarketWatch. He added that with interest rates on credit cards rising to 20% or higher, the fact that more consumers are using them to finance purchases “is a clear sign of financial stress.”
While the U.S. economy has continued to grow despite this pressure on consumers, looking ahead, “it may not grow as quickly, or at least not with the help of this huge stock of household savings” that people have had during the pandemic, when Scott Baker, a professor of finance at Kellogg School of Management, said the government was providing emergency stimulus and COVID-19-related restrictions were limiting people's opportunities to spend money. “A lot of households that were fueling consumer spending are no longer able to do that. I think it's definitely a negative trend.”
The cost of “living” is rising faster than income
“Credit card balances are rising, and so are delinquencies. This indicates increasing financial pressures on consumers,” said Amy Cruz-Cates, chief economist at financial services firm Primerica PRI.
Like McBride, she also blames “the high cost of just getting by” rather than overspending.
Only 3% of middle-income households (incomes between $30,000 and $130,000) surveyed by Primerica said their incomes rose faster than the cost of living, despite slower inflation and higher incomes. The company estimates that over the two-and-a-half years from May 2021 to October 2023, middle-income households spent an average of $2,445 more than the increase in income on essentials alone (food, gas, utilities, and health care, excluding insurance).
“I'm making more money than ever, and… [my wife is] This makes it the highest hourly wage ever. However, with the current financial situation in this country, we find that just living is very stressful. He works full time as an operations manager and earns about $50,000, and his wife works part time as a barista at $20 an hour in Orlando, Florida. They do not bear any child care expenses yet, but basic costs have increased.
Grocery prices in the United States are 25% higher than they were four years ago, and the average rent for two-bedroom listed apartments rose 19% during that period, according to Apartmentlist data. With home prices and interest rates rising over the past two years, average monthly mortgage payments jumped 83% to $2,268 in 2023 from $1,242 in 2019, according to Bankrate.
The result: One in three consumers surveyed told Bankrate they have less emergency savings now than they did last year (compared to 30% who said they have more now).
How to build savings while paying off credit card debt
About 36% of those surveyed by Bankrate want to tackle their debt and savings simultaneously (the highest percentage in seven years); 28% prioritize building emergency savings; And 25% give priority to paying off debts.
It can be difficult to save money while paying off high-interest credit card debt, but it is necessary. Katie Hogan, head of curriculum at financial education company Parthian, said: “If people don't prioritize saving, it will lead to huge pain later on.”
Choose a way to deal with your credit card debt
Hogan recommends using the “avalanche method,” which means ranking debts by highest interest to lowest interest, then paying as much debt as possible on that highest debt and the minimum payments on all other debts. During that period, people should pay their expenses with cash or debit, rather than constantly adding more to their credit card balances.
Another widely used approach is called the “snowball method,” where people pay off the lowest balances first. “This can give you some quick wins in terms of fully paying off some cards faster to help you build momentum,” said Rob Williams, managing director of financial planning at Schwab SCHW.
“The downside is that it may take longer to pay off your total debt and cost more in interest.”
Create a spending plan
Williams encourages people to make a spending plan. “Start by taking a realistic look at where your money is going. Try a spending tracker to help you keep track of what you're spending and why. Then decide what trade-offs you need to make. Having a spending plan is liberating because it puts you in control.
“Assess what you can do — even temporarily — to generate cash to use toward credit card debt: Identify expenses that can be reduced or eliminated such as subscriptions; sell non-essential items online or at a yard sale; do freelance work,” Bankrate's McBride said. Or work under contract, or get an additional part-time job just until the debt is paid in full.
Automate your savings
In the meantime, people should also automate depositing a portion of their paychecks directly into a savings account, McBride said. Some high-yield savings accounts were paying account holders more than 5% interest, which would help them grow without any additional effort. The goal is to eventually have an emergency fund that can cover living expenses for three to six months.
“Be reflective about how you get into credit card debt. This may mean evaluating your relationship with money and examining your personal beliefs and habits around money,” Hogan said. “If you have a problem with overspending, it's important to make small, sustainable changes.”
When your credit card debt is paid off, commit to paying off the monthly balance whenever possible so you don't start the cycle again.
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