Credit card debt: Are consumers returning to bad habits?

Credit card debt increased an estimated $64 billion in 2011, far more than in the previous two years. Holiday shopping bills will swell credit card debt even more in early 2012.

Eric Thayer/Reuters/File
Customers shop at Macy's department store in New York last month. Shoppers increased their credit card debt by an estimated $64 billion in the fourth quarter of 2011.

Americans are edging back toward their bad old pre-recession habits, when they charged whatever they wanted on their credit cards and didn’t worry about the build up of debt. After starting 2011 by paying down over $32 billion in credit card debt, consumers are on track to end the year with a $64 billion increase in their net credit card debt, according to Card Hub’s latest survey of credit card debt.

That’s a far bigger increase than in either 2009 or 2010. Unfortunately, the situation in 2012 will worsen before it improves. You can thank the busy holiday shopping season for that. It occurs during the year’s fourth quarter, which is largely why the fourth quarter sees debt build up faster than in the second and third quarters combined.

Typically, Americans pay down their debt in the first quarter, buoyed by salary bonuses, tax refunds, and New Year’s resolutions. In 2009 and 2010, they paid down more in the first quarter than they ran up new debt through the end of the third quarter. The same cannot be said for 2011.

In the third quarter of 2011, consumer ran up 154 percent more credit card debt than they did in the same period a year earlier.

During the Great Recession, overleveraging (spending more than you bring in) caught up with consumers and companies alike as unemployment skyrocketed and revenue sources dried up and wreaked havoc on our economy. While current credit card debt is far from peak recession levels, the pace at which consumers are adding new debt foreshadows a return to such worrisome levels.

But improve, the situation surely can. Consumers have a number of options at their disposal, but the obvious first step in combating rising debt levels has to be budgeting.  It’s the “obvious” first step, not necessarily an easy one. People who are consistently spending beyond their means need to excise spending from their lives, and this necessitates making tough choices.

Make a list of your monthly expenses and rate them based on importance, with things like food, housing, and insurance taking top priority.  Then cut the lowest ranked items until your spending is below your monthly income threshold with room to spare (you’ll want some savings for an emergency fund). After that, stick to your budget and work to pay down what you currently owe.

When it comes to sticking to a budget, you might find a debit card or a charge card more helpful than a credit card because they are better suited to instilling spending discipline. With a debit card, one can transfer the budgeted amount to a checking account and only spend that amount. Since charge cards do not allow you to carry a balance, you’re automatically insulated from spending more than you can afford to pay back.

On the other hand, if you don’t want to forgo credit cards because of their rewards and low introductory interest rates, you can do a couple of things to prevent overspending. One is to link your account with a checking account in order to impose the spending discipline you need. The other is to call your credit card company and get it to reduce your credit limit so as to be in line with your monthly budget. Confronting the problem of rising credit card debt with a credit card might seem rather ironic, but it is a problem that must be dealt with, so anything that can help should be welcomed.

At the end of the day, the worst thing you can do is ignore the situation until credit card debt becomes unmanageable and the problem becomes more difficult to solve.

– Odysseas Papadimitriou is CEO of Card Hub, a website where consumers can learn about and compare credit cards.

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