As the economy improves, millions of consumers are finding that credit card debt is reaching record levels. By the end of 2015 debt balances were at the highest level since the end of 2009, when the financial crisis was well under way. 2015 recorded credit card balances topping $936 billion dollars according to a recent Federal Reserve Report, with $6 billion added between November and December. An estimated 37% of consumers pay debt balances in full each month, and more than 15% only make minimum payments. Increasing debt can trap consumers into high-interest payments they may be unable to sustain.

Lessons from The 2008 Debt Crisis

2008 was a volatile year for the economy. News agencies reported on major company insolvency and the Federal Government had to shore up major players in both the banking and auto industries to avoid an economic collapse. By the end of 2008, charge-offs and defaults had reduced credit card balances by nearly 20% as the job market collapsed under the economic strain.

Credit card debt peaked at $1,004,359,000 and then began a steady decline over the next 27 months. Total consumer debt hit a low of $792.3 billion dollars in March 2011 and then became very volatile for the next four years, with balances moving up and down from month to month. Since April 2015 debt balances have seen a steady increase beginning at $857 billion in April to $936 billion in December 2015, rising $78 billion dollars in just three quarters. The continuation of this trend will result in debt balances on consumer credit cards topping $1 trillion dollars, by year end.

Unfortunately, charge-offs led the declining credit card balances in 2008 and 2009, far more than consumers paying off debt due to strong balance sheets.

The credit card industry is still a relatively new industry and American Express, which issued the first credit card, recently reached the 50-year mark. Revolving accounts that did not require a full pay off each month were not introduced until the mid-1960’s, making the Baby Boomer generation the first to retire with substantial credit card debt.

Contributing Factors to The Surge

There are a number of economic factors that have led to the recent surge in credit card balances. A few of the top reasons include:

• Wage growth is creeping along at 2.6%. According to the Federal Reserve, a healthy economy should produce 3.5% wage growth to sustain cost of living increases.
• The cost of living has risen an estimated 29% over the last 12 years while wage growth as only increased 26%. Higher costs in education, housing, medical bills and food costs have seen the highest increases.
• Debt accumulation has outpaced growth in income for over a decade. With household income only growing at 2.6% and credit card debt growing at 7.5%, according to the Federal Reserve, these levels have resulted in more consumers struggling to maintain current debt loads.
• Non-revolving debt such as auto loans, student debt, and home mortgages are rising at another 8% for a total increase in overall debt of 15.5%.
• Total household debt in 2015 averaged $130,922 which includes credit cards, mortgages, student loans, personal debt, and car payments. Credit card debt accounts for $15,762 of that total, representing 12% of total debt payments.
• The average consumer pays $6,658 in interest payments each year. For families with a household income of $50,000, that represents 13% of total income. Interest payments average $555 per month for households with average debt loads. These interest payments do not reduce debt balances.
• Credit card companies continue to encourage credit card use as the primary form of payment.

Transactors Versus Revolvers, The Difference Makes A Difference:

Credit card customers fall into one of two categories. Transactors, who pay bills in full each month, or a revolvers who carry a balance from month to month. Transactors can quickly become revolvers if the financial situation declines or savings are not adequate to cover unexpected expenses.

Consumers with the lowest net worth tend to be the ones carrying the highest levels of revolving debt at the highest interest rates. According to the Federal Reserve report, this group pays an average interest rate of 16% and carries a revolving balance of over $10,000 a month. They do not have adequate assets or savings to cover emergency expenses with nearly 30% with no savings at all. Credit cards become the stop-gap for costs that extend beyond income and can lead to a debt crisis when the cards become maxed out, and other options for funding are not available.

Net Worth Versus Income

Net worth measures the overall financial health, where income is the amount of money received each month from all sources. There is a tendency to focus on income. After all, that is what determines the dollar amount available to pay bills and everyday expenses. The trouble with an income approach is that it focuses on the short term and does not build financial stability. How much income is needed this week or this month to pay incoming bills?

Net worth focuses on the long-term bigger picture, and takes total debt balances (rather than minimum monthly payments) into account. Total debt is subtracted from total assets to determine net worth. If the total is negative, there are more total debts than assets.

It is always possible to spend more than is earned, regardless of income level. Celebrity bankruptcies highlight the fact that millions in earnings do not negate spending controls. When overspending occurs regularly, net worth always suffers.

Solving Your Personal Debt Crisis

Getting help through a debt management program is only the first step in turning your financial life around. Changes in habits and spending patterns must also occur to prevent repeating financial mistakes.

A stronger financial future requires addressing the causes of debt accumulation and creating a working budget that will identify current spending patterns. Adjusting the current budget to align with your long-term financial goals can lead to increased savings, higher net worth, and greater financial security.

If you are burdened with high amounts of credit card debt and are struggling to make your payments, or you’re just not seeing your balances go down, call Timberline Financial today for a FREE financial analysis. Our team of highly skilled professionals will evaluate your current situation to see if you may qualify for one of our debt relief programs. You don’t have to struggle with high interest credit card debt any longer. Call (855) 250-8329 or get in touch with us by sending a message through our website here http://timberlinefinancial.com/contact-us/.

If you are burdened with high amounts of credit card debt and are struggling to make your payments, or you’re just not seeing your balances go down, call Timberline Financial today for a free financial analysis.

Our team of highly skilled professionals will evaluate your current situation to see if you may qualify for one of our debt relief programs. You don’t have to struggle with high-interest credit card debt any longer.

Call (855) 250-8329 or get in touch with us by sending a message through our website https://timberlinefinancial.com.