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Tuck Associates Discusses Why Americans Need to Stop Racking Up Credit Card Debt With a Recession Projected

Racking Up Credit Card Debt With a Recession Projected

According to the Economic Policy Institute, there is a good possibility that there will be a recession in the U.S. economy sometime in the next year and a half. Recession is when consumer spending shrinks, due to a lack of funds to spend, such as in the case of unemployment or under-employment. Business spending and expansion shrink as well, due to a lack of consumer spending.

Recessions can sink many middle-class consumers into poverty. Here at Tuck Associates, we would like to discuss why it is important to cease accumulating credit card debt as a recession looms.

What Happened in the Last Recession?

According to the Wharton School of Business, in the last recession, 20 percent of all employees lost their jobs. Many of those people have never been able to find stable and sustainable employment as they had in the past.

The Atlantic Monthly stated that many people lost their homes to foreclosure in the Great Recession and that a majority of those who lost their homes have never really recovered financially from that loss. If they are still in transient housing situations, such as living out of a vehicle or in a hotel or motel, they are forced by the rules of where they must stay to move every two weeks to 28 days. This does not afford them the opportunity to stay long enough in one area to secure better work and a more stable living environment. Thus, the recession's effects have vexed and limited the lives of many people for the last 10 years.

According to the Atlantic Monthly, over half of those who lost homes or employment in the Great Recession still have a credit rating under 620. Basically, between the lack of stable housing and employment, many Americans have fallen into poverty and are finding it very hard to get out.

The Credit Card Spending Problem in the U.S.

Nerdwallet conducted a poll and found that people who carry credit card debt owe on average $6,803. This would be bad enough, if not for the high average interest rate on these cards - around 16 percent. At those high-interest rates, it often can become impossible to pay down the debt ever, so people are forced to primarily service the interest and are not able to pay down much of any of the principles. In fact, Nerdwallet found that the average cost of interest each year for those who carry a credit card balance from month to month is around $1,141 per year.

Other Important Loans

The New York Federal Reserve Bank reported in February very troubling news that 7 million Americans are over 90 days behind in their automobile loans. Since, for most of us, an automobile is a requirement, this means that many people are so deeply in debt that they are beginning to fail to pay for the essentials. Debt can easily snowball into serious financial danger.

The Dangers of Carrying Credit Card Debt During a Recession

The following are very real dangers of carrying credit card debt during a recession:

  • Losing your job means you cannot make the payments
  • Failure to make payments can lead to a lawsuit and garnishment of your wages
  • Failure to make payments can harm your credit rating

What Can You Do to Stop Using Credit Cards?

Leave them at home: If you are an impulsive spender, leave the credit cards at home. That will keep you from making ill-considered purchases and racking up more debt.

Make a budget: Make a budget that takes into account your monthly expenses and breaks up yearly expenses into a monthly component.

Prioritize your spending: Are there unnecessary expenses you can eliminate for now? A good place to begin is Starbucks, dinners out and video subscription services. Any money saved can help you draw down the principle and save money on interest payments.

In terms of prioritizing the payments on more than one credit card, you will save the most money and pay off your debts faster if you pay the minimum each month on all but the credit card with the highest interest.

Increase your income: With a recession looming, increasing and diversifying your income is more important than ever. A side business or gig that actually makes some decent hourly income can help you pay down more of the debt each month.

Create a rainy-day fund: You can use a debit card as a place to save money for yearly expenses as well as for emergencies that can occur. Then, you will not have to resort to using the credit card and incurring more debt.

Consider consolidating loans: At the high rate of interest on credit cards, you may struggle to ever pay them off. Loss of a job or a reduction in hours with your employer will place you at risk of defaulting on those loans, ruining your credit score and leaving you vulnerable to wage garnishment. Instead, debt consolidation loans are personal loans, usually at a lower interest rate, that allows you to pay off your credit card debt. You will pay off the debt sooner because you will have the benefit of a lower interest rate. Also, a debt consolidation loan has a road map to debt pay-down.

We know that a recession is looming. If you are paying off high-interest credit card debt, you are better served to pay the card off as soon as possible. By reducing expenses, earning a bit more money on the side and possibly consolidating your debts, you will be able to shore up this potential stumbling block that may end up destroying your credit during a severe economic downturn. At Tuck Associates, we have solutions for consumers with heavy credit card debt. Call us today with any questions you may have.

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