June 08, 2023
If you have credit cards and you don’t always pay off the balance each month you have plenty of company. According to a recent report from the Consumer Financial Protection Bureau (CFPB) nearly half of credit card users don’t pay off their bills each month, and the average unpaid balance is nearly $4,800.
The cost of that unpaid balance has gone from expensive to even more expensive. The average interest rate for card users with an unpaid balance is nearly 21% these days, up from around 16% a year earlier.
Spending for Needs or Wants?
I totally get it if you have limited income and find yourself using a credit card to pay for essentials. But I sense that many of you with more income are not being financially honest with yourselves.
The CFPB reports that plenty of households earning more than the median US household income of around $70,000 are also dealing with costly unpaid credit card balances. More than half of households surveyed by the CFPB with income between $80,000 and $125,000 have unpaid credit card balances, with an average balance of more than $7,500. And nearly one-third of households with income greater than $125,000 are also carrying costly credit card debt, with an average unpaid balance of around $7,400.
If that rings true in your household, can you honestly tell yourself that the reason for those costly unpaid credit card bills is to cover needs, and not wants? If it’s because of a big medical out-of-pocket cost that’s one thing. Or groceries. Or the utility bills. But be honest: Is your credit card debt a signal that you have inadvertently become a victim of lifestyle creep? That’s the tendency to spend more when we make more.
If you are making a solid income and still can’t avoid credit card debt, I think that may likely be a sign you are living beyond your means.
I was also frustrated to read in the same report that one in four households with income between $80,000-$125,000 reported that they have trouble covering their monthly expenses. And nearly one in four said that if their household’s main source of income disappeared they didn’t have enough savings to cover more than one month of their expenses.
Again, I can’t help but think that for many of you, that’s because of choices to spend more than you honestly need to. The move to the more expensive home, or rental. The too-high monthly car payment because you bought the car you wanted, not the car that honestly fits your budget. And then there are the smaller “want” expenses that can add up to more than a few hundred dollars a month. Scale back what you’re spending on streaming, eating out, concerts, and constant wardrobe changes, then all that savings can be redirected into building up your emergency savings.
I want to stress that this is not a Suze Smackdown. I am just so frustrated that those of you who have more income are likely making choices that can’t help but cause financial stress. I realize you can’t move next week. Or trade in the car next month. But you can decide to stand in your truth and start thinking through if it is possible to restructure your spending so you can finally live below your means but within your needs. Long-term I know you will be happier if you can make those changes. And in the meantime, please please please push yourself to scour your monthly spending on “wants” for potential cuts so you can build up your emergency savings.
Answer Yes or No to the follow statements.
I pay all my credit card bills in full each month.
I have an eight-month emergency savings fund separate from my checking or other bank accounts.
The car I am driving was paid for with cash, or a loan that was no more than three years, and I sure didn’t lease!
I am contributing at least 10% of my gross salary to a retirement plan at work, or I am saving at least that much in an IRA and/or regular taxable account.
I have a long-term asset allocation plan for my retirement investments, and once a year I check to see if I need to do any rebalancing to stay on target with my allocation goals.
I have term life insurance to provide protection to those who are dependent on my income.
I have a will, a trust, an advance directive (living will), and have appointed someone to be my health care proxy.
So how did you do?
If you answered yes to every item, congratulations. If you are working on improving on a few items, I say congratulations as well.
As long as you are comitted to truly creating financial security, I applaud you. If that means you are paying down your credit card balances, or are building up your emergency fun with automated payments, that’s more than fine. You are on your way!
But if you found yourself saying No to any of those questions, and you’re not working on moving to Yes, then I want you to stand in your truth. No matter how good you feel, you have some work to do before you can honestly know what you are on solid financial ground.