Handling Credit Card Debt In An Age of Overspending
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Overspending on credit cards is weighing on the American consumer as the cost of living continues to rise, making it a good time to consider personal strategies to keep those balances under control.

The Federal Reserve Bank of New York tracks consumer debt closely. Its quarterly Household Debt and Credit Report, issued this month, revealed that Americans’ credit card balances topped $1 trillion for the first time ever last quarter. Interestingly, mortgage debt held steady and student loans decreased. But credit card debt jumped by $45 billion.

While a splurge, for whatever reason, can ruin a monthly budget, the bigger picture suggests that inflation and spiraling interest rates are weighing on account balances, especially as everyday purchases like groceries continue to rise in cost. 

Meanwhile, the rise in interest rates translates into higher interest charges on carried balances, as most cards charge an annual percentage rate (APR) linked to the prime rate. This is on top of higher rates for other forms of debt consumers may be holding, including car loans and adjustable-rate mortgages. 

This means that even if consumers are using cards to buy the same amount of things they were a few years ago, they could end up holding an unwanted amount of credit card debt. And in an American economy bursting with enticing products and experiences, many people want more than just what they were buying a few years ago. 

A key concern for consumers is how to manage a bout – or even an extended period – of overspending. 

First, treat one-off expenditures – things like 2022’s  “revenge travel” in reaction to the end of lockdowns - as a moment in time that won’t recur. As with exercise, it can be hard to get back to controlling spending after you’ve gotten off your routine.  If you do slack off, make sure to enjoy and then contain it like The Rock does with his famous Sunday night “cheat meals,” rather than quietly sliding into an unsustainable new normal.

It’s also a good time to keep your credit rating as high as possible. You may not be able to control interest rates, but a better FICO score will generally mean better terms from lenders, including card issuers. Take the time to track your score via any of several free services, including the credit bureaus themselves

One commonly overlooked way to keep your FICO score high is to keep your utilization rate as low as possible. Utilization rate is calculated as the share of total available credit that’s being used. When you use more of your available credit, your utilization rate increases, which can lower your FICO score. So, for example, if you are running up a big balance during the holidays, your FICO score may fluctuate. While the most obvious way to lower your utilization rate is to pay down your balance, increasing the limit on cards can have the same effect. 

The most important thing you can do to protect your credit rating is not missing payments. Signing up for auto-pay can help you set yourself up for success, and you can often set the auto-payment up for the minimum amount due if the full balance is out of your budget. You can also set alerts and reminders on payment due dates to keep yourself from forgetting. Staying on top of budgeting can also help ensure you'll be able to make the minimum payment. Using budgeting tools like Mint can help provide insights and suggestions on budgeting, helping keep you on-track to continue making on-time payments.  

Finally, be careful not to overvalue reward points you get from credit card purchases. Yes, points can sometimes pay out. However, if you find yourself in a position where you are frequently carrying a balance, the value of those rewards might be undercut by a higher interest rate or other fees on the card. Consider looking for options with no rewards but lower interest if you find yourself not paying off your card in full—it could save you money in the long run.

Whatever methods people use to avoid overspending and excess debt, they should know they aren’t alone. Even if interest rates and inflation moderate, everyone needs to have a strategy for optimizing their use of credit cards and other forms of unsecured debt.

Christopher Fred is head of U.S. credit cards and unsecured lending at TD Bank. 

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