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Saturday, July 8, 2023

5 Reasons People Often End Up With Credit Card Debt

Unveiling the root causes behind Americans' debt epidemic.

Image Credit: Avery Evans via Unsplash | Unsplash License

Today, we are seeing more credit card debt in the US than previously recorded. According to a recent report, Americans have accumulated a whopping $986 billion in credit card debt. 

Equally alarming is that Gen Z is currently acquiring credit card debt at a faster rate than previous generations. There are many reasons people accumulate credit card debt, and with younger generations it can indicate a step toward independence. This may explain some of the credit card debt, especially for young people, but it does not account for the vast majority of this debt. If the credit card a person acquires is not helping them move forward in life, and is instead holding them back with weighted chains, it is time to look into developing better habits. Why do so many people end up with credit card debt? Here are 5 common reasons.

1. Spending More Than You Bring In

Most people naturally want to feel pleasure immediately while delaying difficulty as long as possible or avoiding it altogether. Credit cards give us the ability to feel pleasure now, and allow us to feel the burden of paying off that debt much later. With a credit card, a person is extended an amount of money, as debt, that allows them to pay for more than they may actually have or even make in income. This allows a person to buy things and make minimum payments each month over a longer period of time. In turn, this begins to add up with more and more purchases on credit while delaying paying it off in full gets pushed back further and further. Credit card debt accrues incrementally with interest. So, not only do more purchases add to the overall debt, but the interest and fees also increase the total debt. 

For many people, a good way to tackle this problem is with a budget. If you are thinking about putting together a budget, check out the helpful article by Peter Jacobsen, How to Make a Budget in Just a Few Easy Steps.

2. Splurging

Splurging can mean a person is spending freely or extravagantly. This can be frequent shopping escapades, daily Amazon purchases, overzealous bargain shopping, impulsive traveling, exotic vacationing, mindless dating, every weekend at bars, luxurious dining, eating out for every meal, attending many concerts and festivals, extravagant weddings fit for a king and queen, buying the newest bright and shiny thing, etc. Credit cards can give a person a false sense of financial security while delaying payments, leading a person into an oblivious hole they cannot so readily climb out of. 

If this speaks to your credit card debt accumulation, it is time to buckle down and make a specific, strategic, plan to get out of debt. By working through the struggles of paying off debt, we personally develop, and free ourselves from the chains of our more primal, consumeristic desires. Unfortunately, many people confuse consumerism with capitalism, and then falsely place the blame on capitalism. In reality, it is the lack of personal responsibility found in consumerism that deserves blame.  

3. Emergencies 

Emergencies happen, they are an unavoidable part of life for the most part. These emergencies could be a personal medical emergency, an injury, a veterinarian emergency for your pet, a vehicle issue, a dental issue, a broken or lost phone, or a computer malfunction preventing you from working, among many other situations. If a person does not have enough money on hand to pay for the circumstances, they may seek a line of credit. Some of these emergencies can have serious financial costs that take years to pay off, especially when only the minimum amounts due are paid at a time. If you get the credit card at the time of the emergency, you are likely to have a higher interest rate because you were not able to shop around, and this adds to the debt. 

4. High Interest Rates 

Annual percentage rates (APR) have an impact on one’s total credit card debt because the higher that interest rate is the more a person owes for the line of credit spent. Having a higher APR on your credit cards may be indicative of a lower credit score, so if you need help fixing your credit score check out the article 5 Easy Steps for Improving Your Credit Score

Interest rates have risen over the past few years, and the national average for a new credit card has an APR of 22.26% while existing credit cards have an average APR of 20.9%. As long as you carry a balance, that remaining amount requires being paid back with the interest rate you have. This is why some people do debt consolidation, to put their multiple credit card debts together for a lower interest rate when they can find it. Debt consolidation does not necessarily help your credit score, but it may help you pay off your credit card debt faster. Debt consolidation can be done through a bank loan, credit union loan, or by opening a new credit card and transferring the debt to that new card. 

5. Inflation 

Prices are on the rise, which means your money is buying you less and less. This can have a serious effect on your budgeting, and many people use credit cards for especially inflationary periods. Examples of such prices on the rise have been food, gas, insurance, dining, housing, and traveling. If the costs are pushing a person outside of their budget, it may be time to consider creating a new budget, moving to an area that is more affordable, or looking for work that pays more. 

Conclusion

Overall, there are ways to avoid accumulating immense amounts of credit card debt, and there are certainly ways of becoming debt free. We cannot control all that life throws at us, but there are practical precautions and steps we can take by using credit cards in appropriate ways without going into serious debt. Much of the credit card debt a person has can be eliminated with a strategic personal financial plan, being strict with a budget, and remaining faithfully diligent throughout the process. Being debt-free is as much about finance as it is personal responsibility and freedom. 


  • Joshua D. Glawson writes about politics, economics, philosophy, and personal development. He has Bachelor's in Political Science from University of California Irvine.