It’s déjà vu. While the Great Recession didn’t stop our debt-loving ways, U.S. consumers showed steady – albeit modest – improvements in their spending and saving habits until the first quarter of 2013. Yet after a disappointing first quarter, Americans are expected to end the year with nearly $47 billion in new credit card debt to add to the roughly $82 billion incurred during 2011 and 2012 combined.
So, where do we go from here? There are a couple scenarios. We could continue to spend beyond our means until debt levels become unsustainable, charge-off rates bounce back from record lows, credit availability tightens and the economic recovery is put in jeopardy. Or, we can come to the realization pre-recession spending was buoyed by income levels affected by the housing bubble and readjust our perception of necessities, budgeting and paying off debt. Which would you prefer?
It’s pretty much a no-brainer, but that doesn’t mean the process will be easy. Reining in spending requires making tough choices and breaking bad habits. However, the current credit card landscape lends itself to consumer improvement.
More specifically, credit card offers with a zero introductory annual percentage rate are abundant and becoming increasingly attractive. According to data by CardHub.com, the average credit card offering zero percent interest on new purchases has an introductory rate of around 10 months – 2.53 percent longer than offers that were on the market at the end of 2012. The same is true of the average zero percent balance transfer term on credit card offers.
When considering the average indebted household owes a balance of $6,591, according to CardHub’s 2013 credit card study, a middle-of-the-road balance transfer card could be worth as much as $1,000 in avoided fees and finance charges.
High-end outliers can be worth even more. For example, the Slate Card from Chase offers zero percent interest rate for the first 15 months and charges neither an annual fee, nor a balance transfer fee. Suppose you have an average credit card balance and a card with a 17 percent interest rate. If you can afford to pay $275 per month to your credit card company, the Slate Card could help you climb out of debt in a quick fashion.
However, transferring a balance to a credit card alone won’t solve one's debt problems. Consider these tips for getting your personal finance house in order and keeping it in shape moving forward:
1. Maximize your credit standing. Good credit cards on the market like the Slate Card from Chase require an applicant has an above-average credit score to qualify. Since some of these cards provide zero percent interest on new purchases for up to 18 months and hundreds of dollars in initial rewards bonuses, it pays to have good credit. You can estimate where you currently stand, but the credit-building process will be the same regardless of your starting point. The best approach is to open a credit card that has no annual fee and make on-time payments to get positive information flowing into your credit report on a monthly basis.
2. Build an emergency fund. Setting up a financial safety net should be a high priority. Without one, you may be a major emergency expense or an income disruption away from running into serious financial trouble – even if you do manage to get debt-free. A number of experts recommend people have an emergency fund equal to their minimum monthly expenses times at least three months (preferably six months). You can work your way toward that goal by making incremental monthly deposits.
3. Stick to a budget. Recent debt trends make sense when you consider only two in five American consumers maintain a budget, according to the National Foundation for Credit Counseling. To properly manage spending, you need to know where your money is going. As such, review credit card and bank statements, make a list of your monthly expenses and do away with frivolous or unnecessary spending.
4. Utilize the “island approach.” The island approach is a strategy that involves using separate accounts for different types of transactions. At its most basic, this would entail having one credit card for revolving debt and another for everyday expenses. Isolating debt and ongoing spending can make budgeting and sticking to a debt-payoff plan easier.
5. Pay off amounts owed. Many consumers rack up more than one type of debt. Instead of making equal payments across balances, consider making the minimum payment required to stay current on all but focus on paying down your most expensive form of debt. Attributing the lion’s share of your designated monthly installments to the balance with the highest interest rate, and repeating this strategy until you’re debt-free can save you time and money on your journey out of credit card debt.
Odysseas Papadimitriou is the CEO of CardHub.com, a credit card comparison website where you can find information on free balance transfer credit cards.