Anyone who has ever been in debt knows how frustrating, costly, and even dangerous it can be. But, luckily, we’re in the midst of an economic recovery and it’s therefore fair to assume that debt is on the decline, as people are typically better suited to pay their bills when they have jobs, the stock market isn’t tanking, and there is a general air of optimism regarding the future of the economy.
However, these aren’t typical times, and most assumptions are sure to disregard the fact that we as a society appear to have a bona fide obsession with spending beyond our means.
Sure, we were scared straight into paying down about $1 billion in credit card debt during 2009, but since the recession began in December 2007 we’ve actually increased our credit card debt load by $35.5 billion. Much of this can be blamed on the $46.7 billion we added to the tab last year and the $43.5 we’re projected to incur during 2012.
These prodigious numbers might seem a bit abstract to you, but just consider the fact that the average household has a $6,700 balance. With the average interest rate for someone with good credit just north of 17 percent, that means there are a heck of a lot of people out there wasting hundreds or even thousands of dollars on interest when their bank accounts and the economy can least afford it. We all know what can happen when widespread overleveraging is coupled with economic turbulence, so it’s truly in our best interest to reverse course and start doing some personal debt reduction.
In order to do so, it’s important to keep the following in mind:
* We have a distorted sense of necessity: It’s clear that all of us have, to varying degrees, gotten used to a certain type of lifestyle filled with fancy new electronics and other modern-day creature comforts. For example, 23 percent of people claim to need cable or satellite television, 21 percent say they must have a dishwasher, and 10 percent require a flat-screen TV, according to a study from the Pew Charitable Trusts. In other words, people are prioritizing such things ahead of staying out of debt, and that’s an approach that will only last for so long until interest becomes overly burdensome and/or we experience an interruption of income.
* Everyday purchases should be paid for in full each month: Sure, it might take a little while to pay down a major furniture or appliance purchase, but you shouldn’t have to leverage debt in order to afford groceries, clothes, insurance, taxes, an emergency fund, and other standard costs associated with daily life.
* Too few people have a budget: Fifty-six percent of people don’t have a budget, according to the National Foundation for Credit Counseling’s 2012 Consumer Financial Literacy Survey, and 22 percent don’t even have a good idea of how much they spend on food, entertainment, and housing. If you’re going to live within a specified amount, you need to first determine what that amount is and factor in absolute necessities such as food and health insurance before figuring out what discretionary spending makes the cut.
* You can integrate natural safeguards: Not only can you pay your credit card bill with automatic withdrawals from a checking account, but you can also simply ask your issuer to set your monthly spending limit at the amount you have budgeted. In addition, using a separate card for everyday purchases than the one on which you have an existing balance will make it obvious if you can’t manage to pay off normal monthly spending in full.
* Balance transfer credit cards are plateauing: Ever since the Great Recession, credit card companies have been offering 0 percent credit cards as a way to lure new customers with excellent credit. Trends show that these offers are plateauing, which means now is when you should take a time out from interest, save a bunch of money, and try to finally rid yourself of debt.
* Credit card calculators make things easier: Identifying the right balance transfer credit card for your needs might seem difficult, but all you really have to do is plug some information about your current balance, interest rate, and timetable to debt freedom into a credit card calculator, and it will indicate the monthly payment you should ideally be making, the right card to use, and how much that card will save you.
What all this amounts to is a clear plan for personal debt reduction now and staying debt free in the future. So, transfer your existing balance to a 0 percent credit card, designate another card for everyday purchasing, set a budget, and remain committed to making the requisite monthly payments. You and the country on the whole will be in far better shape if we can all manage to do that.
Odysseas Papadimitriou is the CEO of Card Hub, a website that covers the credit card industry, and Wallet Hub, the first social network dedicated solely to personal finance.