Going into the 2021 holiday season, an estimated 29% of shoppers that used credit cards for purchases are still struggling to pay off holiday debt from last year.
Following a record amount of credit card debt payment from Americans in 2020, card balances have already risen again by around $17 billion in 2021. With holiday spending expected to reach a maximum height this year due to product shortages, it will be especially difficult for shoppers to keep up with holiday debt.
Consumer debt. It seems to be an inevitable part of life for many Americans. In fact, most American consumers carry some level of debt. Getting out of it, however, is not so easy, which is why so many Americans use at least some portion of their income to pay towards their debt. Determining how much is appropriate can be complicated, depending on the consumer’s individual circumstances.
Generally speaking, it is important to pay more than the monthly minimum payment. A good rule of thumb is to follow the 50/30/20 rule. What this budgeting rule entails is the consumer spends 50 percent of monthly after-tax income or net income towards essential living expenses, such as mortgage payments, utility bills, food, and transportation costs. After that 50 percent is paid, the consumer allots the next 30 percent to his or her “wants,” meaning eating out, going on vacation, and other non-essential expenses. The remaining 20 percent is left for paying off debt or saving for the future.
Credit card debt can cause a lot of damage, and not just to your credit score. Credit card debt can cause stress and wreak havoc on relationships. It can also lead to depression, anxiety, and other health problems. Once you are in debt, reaching your financial goals becomes much harder. Spending money paying debt leaves you with less money for retirement savings, purchasing a home, and achieving other financial milestones.
According to a recent study, carrying significant debt can lead to more than just a bad day. Researchers followed a group of baby boomers, starting when they were between the ages of 28 and 40 and then checking in with them again in their 50’s and older. The group was then separated into subgroups based on how much unsecured debt they had. According to the data, the more unsecured debt a person had, the higher level of physical pain he or she lived with when compared to individuals in the other groups.
For many people the word ‘debt’ is a four letter word. A word that resonates a certain fear and anxiety, oftentimes associated with credit card bills and collection calls. However, taking on certain kinds of debt can serve as a means to an end. For example, borrowing money to go to college and earn a degree, starting a business, or purchasing a home or car.
Determining how much debt is too much debt can be tricky. If you have a good job, are in good health, and keep track of your finances, and interest rates, debt can be managed effectively. If used wisely, and for things that grow in value, like a home or education, it can be useful.
A credit card can be a useful tool when it comes to improving a consumer’s credit score or financing large purchases. However, when credit card spending gets out of hand, it can be easy for that balance to grow out of control. The following tips can be helpful for consumers using credit cards to pay for daily expenses.
Avoid Maxing Out Credit Cards
Most credit cards come with a maximum spending limit, and while it can be tempting to rely on that figure when making credit card purchases, it is important that consumers avoid reaching that maximum amount. One reason for avoiding this is a maxed-out credit card can reflect negatively on a consumer’s credit score. If a consumer uses more than 30 percent of his or her available credit, his or her credit score will be reduced. This reduction occurs because credit utilization ratios are considered by credit reporting agencies when calculating a person’s credit score. Many credit cards also tack on fees to the person’s balance if he or she goes over the card’s limit.
Paying down a credit card balance can be difficult, especially if the card carries a high interest rate. According to CreditCards.com, the average credit card interest rate in the U.S. is 16.15 percent (16.15%), and for many consumers, their interest rate is significantly higher, which can make paying off large balances very difficult. The good news is credit card interest rates can be negotiated, so long as the consumer knows how to do it.
It helps to do some preparation before contacting the credit card company. The consumer should first be aware of what his or her credit score is before making contact. The credit card company will closely examine the consumer’s credit score, as well as his or her payment history. Every consumer is entitled to a free annual credit report, which should be closely reviewed before calling the credit card company. Be aware of all missed payments or late payments in case these are brought up in conversation.
Credit card balances saw a record reduction during the first quarter of 2021, after a previous record-setting reduction year was seen in 2020. According to a study published by the personal-finance website WalletHub, American consumers paid off $56.5 billion in credit card debt during the first quarter of 2021.
WalletHub reported that American consumers paid off $82.1 billion in credit card debt in 2020, which is a significant accomplishment considering the challenges many people faced last year. However, this decrease in credit card balances does not necessarily mean that the credit card debt crisis has been solved. There is still a collectively $900 billion in outstanding credit card debt. The average household carries a balance of $7,519, and these figures are expected to rise. In fact, WalletHub is projecting consumers will add $60 billion to the nation’s total credit card balances.
The quarter one decrease in credit card debt was 51 percent larger than the average credit balance paydown since the Great Recession.
Certain U.S. cities did better than others in paying down credit card balances. Pembroke Pines, Florida, ranked number five on WalletHub’s list with an average household credit card debt of $16,549 and a total credit card debt of $948,650,144. Pembroke Pines citizens paid a total of $64,124,649 of this credit card debt with an average household balance paydown of $1,119.
Fort Lauderdale came in 24th on the list of cities that did well in paying down their credit card balances. The average Fort Lauderdale household carried $14,400 in credit card debt with a total debt in the amount of $1,073,761,245. Of this amount, Fort Lauderdale residents paid down $72,581,618.
Financial analysts believe that this data shows that U.S. consumers are in good financial shape in 2021. However, they do anticipate a $60 billion national increase by the end of the fourth quarter of 2021, considering the fact that COVID stimulus packages and additional unemployment benefits will phase out this year.
As bankruptcy attorneys, we see credit card debt as one of the most common problems facing those with serious financial challenges. It is not surprising with the high interest rates, unreasonable fees, harassing debt collection calls, penalties and never-ending minimum payments that do not even make a dent in your actual debt.
Filing for bankruptcy is a viable option for those struggling with insurmountable credit card debt. Chapter 7 is the fastest form of consumer bankruptcy and forgives most unsecured debts like credit card debt, medical bills and personal loans. There are certain qualifications a consumer must meet in regards to income, assets and expenses to file for Chapter 7 bankruptcy, which is determined by the bankruptcy means test.
If you have questions on this topic or are in financial crisis and considering filing for bankruptcy, contact an experienced Miami bankruptcy attorney who can advise you of all of your options. As an experienced CPA as well as a proven bankruptcy lawyer, Timothy Kingcade knows how to help clients take full advantage of the bankruptcy laws to protect their assets and get successful results. Since 1996 Kingcade Garcia McMaken has been helping people from all walks of life build a better tomorrow. Our attorneys’ help thousands of people every year take advantage of their rights under bankruptcy protection to restart, rebuild and recover. The day you hire our firm, we will contact your creditors to stop the harassment. You can also find useful consumer information on the Kingcade Garcia McMaken website at www.miamibankruptcy.com.
Credit card debt is not the only type of consumer debt people struggle with. Once this debt is paid off in full, it helps to have a plan on which debts to tackle next.
According to data from the Federal Reserve and TransUnion, American consumers paid off a total of $82.9 billion in credit card debt in 2020. Credit card balances continued to drop by $49 billion in the first quarter of 2021, which is the second-largest quarterly balance decline seen since 1999. Despite this fact, more than 20 million American consumers have their student loan debts in forbearance.
For the most part, financial advisors recommend that consumers pay down any debts they have that carry the highest interest rates, which is why credit cards are usually the first focus. With stimulus programs still in place, providing extra income to consumers temporarily, many financial advisors argue a different theory should be followed.
Instead of focusing on the debt with the highest interest rate, consumers should look at all their debts and consider other options, such as refinancing other debt sources to lower their interest rates or modify payments. Refinancing could be a possibility for unsecured personal loans, as well as for mortgage debt. With lower interest rates, consumers are encouraged to take advantage of this opportunity to save money and lower monthly payments, making it easier to pay off debts in full.
Once credit card debt is paid off, many financial advisors recommend that consumers focus next on paying off their car loans. A car loses its value significantly as soon as it is driven, which is why so many consumers find themselves owing more on the car loan than the vehicle is worth. The interest rates of car loans tend to be moderate to high, although not always as high as credit card debt, depending on the consumer. Many times, it is advisable to either sell the car and use the proceeds to pay off what is owed on the loan or to refinance the loan.
Once personal loans, credit card debt, and car loans are paid off by the consumer, it may then be advisable to pay off outstanding federal student loans. Since payments and interest is paused on federal student loans until September 30, 2021. During this time, any payment will go towards principal and not interest rate. Paying down this debt will only help improve the consumer’s credit score.
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If you have questions on this topic or are in financial crisis and considering filing for bankruptcy, contact an experienced Miami bankruptcy attorney who can advise you of all of your options. As an experienced CPA as well as a proven bankruptcy lawyer, Timothy Kingcade knows how to help clients take full advantage of the bankruptcy laws to protect their assets and get successful results. Since 1996 Kingcade Garcia McMaken has been helping people from all walks of life build a better tomorrow. Our attorneys’ help thousands of people every year take advantage of their rights under bankruptcy protection to restart, rebuild and recover. The day you hire our firm, we will contact your creditors to stop the harassment. You can also find useful consumer information on the Kingcade Garcia McMaken website at www.miamibankruptcy.com.
Credit card debt is a burden that many consumers struggle with. Without a large influx of cash, it can be difficult to pay off outstanding credit card bills. Many consumers also struggle with deciding whether they should focus first on paying these debts off or whether they should be taking any extra funds and saving for retirement in a 401(k) or similar plan.
Paying Off Credit Card Debt
Credit cards come with high interest rates, which can make paying the balance off impossible. The larger the balance gets, the harder it can be to pay down, which is why it can often be a good idea to focus on paying this debt down first. Additionally, paying down the credit card balance to zero will also noticeably improve the consumer’s credit score. A better credit score will eventually benefit him or her for when it comes time to make a big purchase, such as a car or a home. It will also eliminate the monthly payment from the consumer’s budget, allowing him or her the chance to save for the future, including retirement.
Many consumers find themselves still struggling with large amounts of credit card debt. Much of this credit card debt is carried over from previous years. Certain steps can be taken to tackle credit card debt and either pay it off in full or reduce the amount owed to a more reasonable number.
The first step is to push the pause button on spending and inventory the situation. The consumer’s debt cannot be conquered until the spending stops. It is important to review what has been purchased the past few months, determining how much has been spent and what is owed. It also helps to write down what the interest rate is for each card, noting the balance owed and the minimum monthly payment. Taking this first step will allow the consumer to be able to put together a budget and a plan to pay off the debt over time.
Once the consumer has a chance to review his or her debt situation, the next step is to select a strategy to pay down the debt. Two of the most common methods include the snowball method and the avalanche method.
With the snowball method, the consumer arranges his or her credit card balances from smallest to largest balances. The consumer focuses his or her attention on the card with the smallest balance first, paying down as much as possible on that card while continuing to make the minimum monthly payments on the other cards. Once the first card is paid in full, the consumer focuses on the card with the next smallest balance until all cards are paid off in full. The snowball method requires a great deal of patience and discipline, but it can be an effective way to pay down debt. However, this method does involve paying more in interest over time since credit cards with higher balances tend to have higher interest rates.
The avalanche method works similarly to the snowball method, but the consumer focuses on the credit card with the highest interest rate first. This method allows the consumer to get out of debt quicker than the snowball method since it focuses on the larger balances with the higher interest rates first, but it can be hard to stay motivated with this method since seeing the results of the consumer’s efforts can be harder to immediately see.
Another method to pay down credit card debt involves consolidating the debt through a personal loan or balance transfer. Many credit card companies offer balance transfers, allowing the consumer to transfer multiple credit card balances to one card with a zero or low introductory interest rates. It is important that the consumer pay the balance down before that promotional period expires, however. Otherwise, the interest rate can skyrocket at the end of the promotional period, leaving the consumer in a worse position than before. A personal loan can also be used to pay off all the consumer’s credit card balances. This method allows the consumer to focus his or her attention on one, fixed monthly payment over time in lieu of multiple credit card payments.
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If you have questions on this topic or are in financial crisis and considering filing for bankruptcy, contact an experienced Miami bankruptcy attorney who can advise you of all of your options. As an experienced CPA as well as a proven bankruptcy lawyer, Timothy Kingcade knows how to help clients take full advantage of the bankruptcy laws to protect their assets and get successful results. Since 1996 Kingcade Garcia McMaken has been helping people from all walks of life build a better tomorrow. Our attorneys’ help thousands of people every year take advantage of their rights under bankruptcy protection to restart, rebuild and recover. The day you hire our firm, we will contact your creditors to stop the harassment. You can also find useful consumer information on the Kingcade Garcia McMaken website at www.miamibankruptcy.com.
