Credit Cards and Living Expenses

“Difficulty is the excuse history never accepts.”
- Edward R. Murrow

The use of credit cards has become a problem of epidemic proportions in the United States. With rising costs of living and flat incomes, families are using credit cards to help pay their living expenses. The average American is living beyond their means due to increased of their credit cards.

This is a sign that the American family is desperately struggling to stay afloat in an increasingly unstable economy. The average household has experienced slow growing incomes that do not keep pace with the rising cost of housing, health care and other basic expenses.

Since the early 1980’s there has been an explosive rise in consumer debt and according to the Center for Responsible Living, credit card debt has tripled since 1989, with Americans owing more than $800 billion in credit card debt alone. There has been over $350 billion in home equity loans to home owners between 2001 and 2003 and personal bankruptcies have gone from 616,000 in 1989 to over 2.5 million in 2005 before revisions to the bankruptcy laws made it almost impossible for a consumer to file chapter 7 bankruptcy.

A survey of low to middle income families reveals that families are going into credit card debt due to drops in income and unexpected expenses. Seven out of ten households reported that they have been using their credit cards to pay for car repairs, basic living expenses, medical expenses, house repairs and paying down other credit cards.

One out of three of the households surveyed indicate that they regularly use their credit cards to pay basic living expenses such as rent, mortgage payments, groceries, utilities and insurance because they did not have sufficient funds in their checking or savings account.

You can see how this is a dangerous practice and can result in what is equivalent to financial suicide. The reasons range from loss of job, prolonged unemployment and unexpected health care costs. It is a sad fact that the average American family is one or two paychecks away from the poor house. In one of the richest countries in the world, this is highly unacceptable.

Another dangerous practice that homeowners are using is taking the equity out of their homes to pay off their credit card debt. While there are tax advantages and the mortgage and banking industry promote consolidation loans, it is not wise to remove the security of your home to pay an unsecured debt like a credit card. You are jeopardizing the single most valuable asset that you possess.

While in theory, the use of home equity to pay off higher interest credit cards provides a short term solution but does not address the long term economic reality that families face. A non-secured debt burden does not warrant risking your home. There are more serious consequences in missing a mortgage payment than missing a credit card payment.

The harsh reality for a family is that wage increases have averaged only 5 percent while fixed costs like housing, child care, health insurance, groceries and taxes has climbed from 53 percent to 75 percent.

Over the course of the last thirty years, American’s savings rate has declined to the point of non-existance. Individuals have put themselves in the position that they must use their credit cards in situations where traditionally funds set aside for “rainy days” would have been used. Savings normally serve two important functions: they help with temporary income loss and unexpected expenses and it help families plan for the future.

With the current trend in family financial practices, what will America’s future hold?