The Community Post

Pitfalls to avoid when tackling debt

High consumer debt can compromise individuals’ financial futures and have an adverse effect on their overall health. Debt has long been an issue that threatens individuals’ well-being, but the good news is that certain debts seem to be on the decline.

According to the “Quarterly Report on Household Debt and Credit” that was released in May 2021 by the Federal Reserve Bank of New York, credit card balances were $157 billion lower by the end of the first quarter of 2021 than they had been at the end of 2019. Authors of the report credit that decline to paydowns by buyers and reduced consumption opportunities related to the pandemic. Individuals who want to avoid debt can keep an eye open for these pitfalls.

• Retail credit cards: Many retailers offer their own credit cards. Consumers may be enticed to sign up for such cards by the opportunity for instant, and often significant, savings. For example, a home improvement store may offer an immediate 25 percent discount to customers who sign up for a store credit card and use the card to make a purchase. As enticing as such savings can be, consumers should recognize that a recent study by CreditCards. com found that the average retail credit card APR is 25.9 percent. That’s more than 6 percent higher than a general purpose credit card. Consumers who cannot pay balances in full each month could end up paying much more in interest if they use retail credit cards instead of general purpose cards.

• Too many accounts: A 2019 study from the credit reporting agency Experian found that the average American has four credit cards. Though many consumers can effectively manage that many cards, the more cards an individual has, the easier it can be to lose track of spending. More cards also means a greater potential for more debt, as each card has its own limit that is unrelated to the limits on other cards.

• Bonus hunting: Another pitfall to avoid is the temptation to use credit cards instead of cash in an effort to accumulate more travel miles or cash back bonuses. Consumers should aspire to use cash over credit whenever possible. Doing so ensures consumers are not spending money they don’t have, which is one of the most common ways that individuals build significant consumer debt.

• Failure to budget: A budget is the most effective way for individuals to gain control of their spending. That lesson seems to resonate more with young people than older men and women. A 2019 poll from Debt. com found that 74 percent of consumers between the ages of 23 and 38 use a budget to govern their spending, while only 67 percent of consumers between the ages of 39 and 54 use a budget. A failure to budget can increase the risk of spending impulsively and make it hard for consumers to see what’s coming in and what’s going out. That’s a recipe for accumulating debt. Avoiding certain pitfalls can help consumers avoid accumulating debt that can adversely affect their financial futures.

Financial Planning

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2022-01-25T08:00:00.0000000Z

2022-01-25T08:00:00.0000000Z

https://thecommunitypost.pressreader.com/article/281616718751752

Alberta Newspaper Group