How Should I Handle Credit Card Debt?

by | Nov 7, 2022 | Blog

Credit card debt is always a topic of debate in personal finance. This post could be extremely short. How should you hand credit card debt? Easy. If you have a balance, pay it off. Done.

But, as with many things in personal finance, the right answer is it depends on your personal circumstances.

Credit card debt is making headlines again here in the fall of 2022 because it is back to levels not seen since pre-pandemic times in 2019. Again, depending on how you view this it could be good or bad. It could be good because it shows that spending has largely recovered from the lows of the last two years. Meaning our economy is back on solid footing.

We’ve talked extensively about how many economic charts were broken in 2020. The chart of credit card debt is no different. If you measure from the bottom last year, it is up 22.5% (from $745.7 billion in 2021 to $916.3 billion in 2022). But if you measure from 2019, different story.

It could also be bad because the more outstanding credit card debt there is, the higher the likelihood of defaults and other issues for the lending banks. It also could speak to the impact of inflation of people’s spending.

Everyday items costing more could be a reason why credit card balances are back on the rise. And if folks are using credit cards to purchase everyday items, that means savings rate are down and money being socked away for retirement is also probably down. These aren’t necessarily current problems, but could spell trouble down the road.

It’s best to not paint all credit card usage with a broad brush because they are used differently across the board. If you have the money in savings but use a credit card for other benefits, like travel points, and pay the balance off each month before the interest starts to accumulate, well, you’d be hard pressed to find someone to disagree with you on that strategy.

But, unfortunately, if you are using credit cards for everyday purchases like grocery, clothing, gas etc.. and don’t actually have the money to pay it off at the end of the month, it can be concerning. Credit card balances can spiral out of control quickly if you don’t pay them off, especially in this interest rate environment.

We understand that things happen, and if you don’t have an emergency fund, you might have no other option. You have to do what you have to do.

There is no shame in pinching pennies for a couple of months to get yourself back on solid footing. Short-term discomfort and missing out on some things is preferrable to putting yourself in the hole over the long-term. Because the longer you put the problem off, the worse it is likely to become.

Some card issuers are heavily promoting offers with introductory 0% interest rates for the first few months. This had led to some taking their balance from one card and transferring it to another. But we view this as a temporary solution and not really fixing the problem.

So, how should you handle credit card debt?

When you boil down how to solve credit card debt, there is no easy answer. The cause is living above your means. And the solution is to live below your means. Which, while it sounds simple, is easier said than done.

Credit card problems are really a cash flow problem that’s gotten out of control. Managing your cash flow is the broad base of the financial pyramid. Everything builds on top of it. And if the foundation isn’t sturdy (if you’re repeatedly spending more than you earn) it is all going to come falling down at some point.

There’s often a lot of guilt tripping in personal finance, and that’s not the goal of this post. Life can be unexpected and change on a dime (pun intended).

We’ve been doing this long enough to know that you probably won’t be able to manage every single emergency expense perfectly. That you might have to go into debt just to survive and make ends meet. That’s fine. Over the short-term.

Managing the unexpected isn’t about doing everything perfectly in the moment. It’s more about minimizing the time it takes to course correct and get back on your feet.

Credit cards are a slippery slope. Budgets might have been stretched in 2022 and things might be feeling tight financially. We’re heading into the end of the year here. We recommend taking a look back at your expenses throughout the year and figure out what changes it’s going to take in 2023 to get back on track. If you need help with this process, we’d be happy to help.

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