Home Personal Finance Credit card ‘should be a last resort’ as U.S. household debt hits record Q1 high: Financial advisor

Credit card ‘should be a last resort’ as U.S. household debt hits record Q1 high: Financial advisor

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GenWealth Financial Advisor Scott Inman discusses the state of credit card spending in US households and details how consumers should think about debt management.

video transcript

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U.S. household debt surpassed a record $17 trillion this year, and credit card balances totaled over $900 billion. And this quarter, for the first time in over 20 years, credit card debt didn’t go down, indicating fewer people are paying off their balances. This means that consumers are increasingly relying on credit cards to make ends meet. The average American card balance is up 14% year-over-year, according to a TransUnion report.

Scott Inman is GenWealth’s financial advisor. He has now joined us to talk all about FlexShares-sponsored credit card debt. Thank you for coming here. It’s amazing to see some of these numbers, Scott. So people seem to think that the prices are obviously higher. They are checking their household balance sheets in a variety of ways as their credit card debt is on the rise. Overall, how should people think about how they use credit cards?

Scott Inman: Well, first of all, thank you for having me. There is no doubt that the current economic environment, the most inflationary in two years, has put people in a pinch perhaps even more than before. We also understand that using a credit card may seem like a last resort. It may actually be so. But when it comes to using credit cards, what we tell our client is that he actually has a two-pronged approach.

We need to understand and be educated how to use them wisely. And it’s not a piggy bank. Not a place to spend your money on vacation. This is not the place to buy your next car or small toy. Leave a balance on your credit card only as a last resort. I think the only value a credit card has is having a payment method that allows you to redeem points, give points, or take advantage of some kind of loyalty program.

I’m not against having a credit card, but it should only be used within your monthly budget. And I think you’re seeing here that people are having a hard time paying their expenses within their income.

For households using credit cards for whatever reason in the current environment we are in, or for individuals currently using credit cards as a bridge, how can we effectively ensure payments can be made? Can I use a credit card? Do you think that if it goes down later it won’t take a toll on their own financial structure?

Scott Inman: So yeah, if you had a balance and had to get there, but some debt, I think you’d have to get over that credit card debt. If you can’t effectively plan to do that in the short term at this point, I think you should consider the 0% offer. I mean, they’re still there. A portion of these balances can be transferred to 0% interest for a period of time.

But here we go back to the word plan again. Because that’s where we have to get to: working with financial advisors to find ways to reconcile income and expenses and attack payments on that basis. If you switch to a 0% introductory offer, and it’s an 18-month offer, you’ll want to complete the payment and have a way to confirm that you’ve paid in full within the 18-month period. Otherwise there is an obvious danger. For then you would accumulate virtually all the interest that could have been deferred.

So everything comes in the context of planning an all-out attack on debt. And credit card debt needs to be wiped out first.

Well, it’s probably most dangerous when the costs start to pile up. Scott, we talked earlier about the benefits of having a credit card. In fact, the reason you have a credit card is if you want to reclaim some of these perks. What about the idea that it helps your credit score as well. is it a myth? Is it true that having a credit card is convenient?

Scott Inman: It’s not a myth. I mean, if you have a record of paying off a debt, whether it’s a credit card or some other loan, and you have a good record of paying that debt, I think it actually helps your credit score. However, I don’t want to stay late. At the beginning of this section, I mentioned the increase in delinquencies. The danger is that you don’t want to be like, “I need a credit card because I want a good credit score.”

Because too much debt on that credit card can actually ruin your credit score. It doesn’t matter if you have one. In many places, I think you’ll be told, “I don’t even have a credit card.” It doesn’t matter if it is. However, it should be used within a disciplined and planned approach. Otherwise, you may run into big problems.

GenWealth Financial Advisor Scott Inman joins us today. Thank you very much Scott, I appreciate it.

Scott Inman: Thank you for inviting me.

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