Although the recession ended six years ago, many consumers are still finding themselves in debt due to credit card spending.
Nearly one-quarter (24%) of Americans owe more money in credit card debt than they have saved for emergencies, according to Bankrate’s February Financial Security Index survey.
But the problem with credit card debt is that it makes it harder for Americans to dig themselves out of that debt. Credit card companies charge higher interest rates than a savings account will pay, which makes establishing some emergency funds even more difficult.
Kelley Long, a member of the American Institute of CPAs, said that consumers should work on paying down high interest rates before saving.
But that can be easier said than done. “Not having an emergency fallback fund is just a first-class ticket to getting further into debt,” Long told Bankrate.
But for many households, savings isn’t a priority — even though it should be.
Financial analyst Greg McBride explained that most American households are unable to get started on a proper savings plan. “It’s difficult for people to really move the needle on savings when their income hasn’t grown.”
Long agrees. Most people don’t plan and underestimate their lifestyle costs, leading to dipping into what few funds they have for non-essentials, like going to a best friend’s wedding or taking a family vacation.
But most Americans are likely to have some sort of emergency expenses over the next year.
The National Endowment for Financial Education found that 63% of Americans had major and unexpected costs to pay in 2014, such as medical bills, moving costs, or housing repairs.
In addition to saving, there are plenty of other steps that consumers can take to reduce their debt, such as watching online spending. Online payment processing services make it easy to buy items from anywhere at anytime, so this can also increase credit card debt.
Tom Corley, author of the book Rich Habits: The Daily Habits of Successful People, recommends limiting the number of credit cards used regularly.
Corley found that around 92% of richer people only had one credit card and used that regularly. Spreading around spending can lead to sloppy savings habits later on.
Paying off balances in full and on-time can also help consumers limit their spending.
Additionally, Corley recommends that consumers know their credit scores and use any reward points on their cards when the opportunity arises. The latter tip can help increase spending while not affecting savings.