In Washington, a recent report revealed that both the income and credit card debts are rising. In fact, this city is listed as having one of the highest balance when it comes to credit cards. While this should cause residents to panic – surprisingly it does not. Experts believe that it is because of the rising income. Since the salary is also higher, people are getting more confident that they can use credit and be able to pay it back.
Of course, we all know that basing your credit use on your increasing income is not a good idea. If you suddenly lose that income, what will happen to you?
After the Great Recession, Americans became hesitant in accumulating credit card debt. It was one of the things that made life more difficult during that time. When a lot of people lost their jobs, it became harder for them to recover because they had a lot of high-interest credit card debts. They were forced to default on their payments because their limited resources had to go to their basic necessities. Of course, when debt is not paid, that opens several problems that Americans have to pay in the future.
If you think that we have learned our lesson, think again. Apparently, Americans have started to accumulate this type of debt once more. In fact, consumer debt, in general, has grown so much over the past decade. All the types of debt like a mortgage, student loans, auto loans, and others have grown. And the level of debt should be scaring us already.
When both income and credit card debt is high
We all want to increase our income but what makes it scary is how we react to it. Let us discuss what is really happening when both our income and credit card debt is increasing.
A high income means people are more confident
There is nothing like a high income to make you feel confident and self-assured. When you know you have enough financial resources, you are more open to making risky decisions. According to the data from the US Census Bureau, the median household income increased by 3.2% between 2015 to 2016. This made the average income to more than $59,000. This seems a lot and leaves room for extra spending. With the economy getting better and jobs becoming more stable, people are starting to feel more aggressive and brave in their financial decisions. One of these includes the use of credit.
A high credit card debt is proof that people are more confident
It is safe to say that the high credit card use is caused by the higher income. Consumers are confident that they can spend beyond their income today because their rising income can help them pay for it. In fact, they have now accumulated an average of $6,375 in credit card debt.
The truth is, the use of credit is not so bad. It is proof that people are more confident with their financial situation. It hints that they are in a good financial position. But even if that is true, when it comes to credit, you need to exert some caution. It is not really wise to base your spending now on what you hope to earn in the future. If something happens to your income, what will you use to pay your debt?
If you want to purchase something using your credit card, make sure you can pay it back within the billing cycle. In case that is not possible, do not spend so much on your credit card.
So far, we know that a high income and credit card debt is okay – but only if you know that you can pay it off. But the moment it becomes a struggle to pay it back then you should start getting more concerned.
A high default rate indicates irresponsible credit behavior
The use of credit is okay – until you look at how people are paying it back. If the default rate is also rising, that is a sign of trouble. People are starting to become irresponsible with their use of credit and that is never a good thing.
According to data, the charge-off rate has fallen since the Great Recession – but it is steadily rising again. While it is not yet the same, the fact remains that it is still increasing. This means people are unable to pay off their debts. And it is not just a late payment. A debt is charged off if a long time has passed since it was last paid – usually 90 days or more. If it took you this long without paying off the card, that means you have no means to pay it back. If you only forgot about paying the debt, it will not take you almost 3 months. You should have paid it within a month or two.
When you reach a point that you have too much debt that you start defaulting on them, that is an indication of a bigger financial problem. It is an indication that regardless of the higher income, the debt is too much for you to handle. Among the other debts, your credit card balance deserves a lot of attention because of the high-interest rate. If left unpaid, it can grow significantly and can quickly bury you in debt.
Smart moves when your income and credit card debt are high
There are specific smart financial moves that you need to do whenever your income and credit card debts are increasing. The truth is, any change that your finances will encounter should be dealt with in a smart way. There is no excuse to be irresponsible with your money. Even if you end up winning millions of dollars, you have to be very cautious with how you spend your money. Think about the lottery winners and how they end up in a worse financial position after winning. They end up with so much debt. That is because they were very irresponsible with their money.
No matter how much you have when you start, if you do not manage it wisely, that money can quickly run out. And soon, you might end up with no income and a lot of debt.
If you happen to find yourself with an increasing income and credit card debt, here are some of the things that you need to do so you can manage both wisely.
Review your budget plan
Start by looking at your budget plan. If you do not have one, then it is a must that you create your own budget plan. Whether you have a lot of money or not, you need this in your life. It is not only necessary to help you survive on a tight budget. It is also something that can help you take advantage of your increasing income.
A budget plan will give you an overview of your financial situation. It will help you make decisions about where your money is needed most. If you have a lot of credit card debt, you can see how much money can be spared to pay it off.
Identify the cause of your credit card debts
After a budget plan, you need to analyze your credit card debts. First of all, you need to figure out how you have come to have a lot of debts. Was it because of an emergency? Or maybe it was an impulse spending? There are so many reasons why your debt has accumulated. You need to find out the cause so you can solve it. First of all, you need to stop accumulating debt until you have a plan to pay it off. Then you need to figure out how you can keep yourself from relying too much on your credit cards again.
Choose a debt relief plan
Once you have analyzed your credit card issues, it is time to choose a debt relief plan that will help you pay off your balance. There are debt relief options that you can do on your own like debt consolidation loans, snowball, and avalanche methods. There are also those that involve a professional like credit counseling, debt management, and debt settlement. It is up to you what you want to use to get out of debt. Before you make a decision, consider how much you can afford to pay and the magnitude of your credit card debt. It is very important to choose an option that you can commit to.
Set financial goals
Finally, you need to set financial goals. One of these goals will be to pay off your credit card debt. But beyond that, you need to make more goals. This will help motivate you to use your money wisely. The goals that you can focus on includes your retirement plan, emergency fund, and even a down payment for your new house. If you want to go on an annual vacation, make sure you include that as your saving goal. That way, you do not have to use credit to enjoy a vacation. These financial goals will be a better use of your increasing income.