According to Credit Karma, total U.S. credit card debt “hit a record high at the end of 2018, slightly surpassing a peak last seen in 2008, during the recession.” And, on average, people are holding around $3,100 of credit card debt at any one time.
In its most recent research, Credit Karma said by age group Generation X had the highest average credit card debt per person at about $3,800 followed by Baby Boomers with nearly $3,600 while Millennials, who, as a cohort, are earning less money, have more than $2,660 in credit card debt.
But what’s driving consumers to load up their credit cards? And how is this impacting their credit scores? Here, Dana Marineau, vice president of brand, creative and communications at Credit Karma, sheds some light on what’s behind the numbers and what consumers can do to improve their financial situations.
WWD: What’s pushing consumers toward taking on heavy credit card debt? And how does that impact their credit scores, if at all?
Dana Marineau: FOMO, or fear of missing out, for one. Our research shows nearly 40 percent of Millennials overspend to keep up with friends and 27 percent feel uncomfortable saying “no,” which means many young Americans are spending money on things they can’t really afford. When you think about it, today’s vehicle for “keeping up with the Joneses” is social media, which also contributes to the accumulation of debt.
Amongst a number of other factors, maxing out credit cards negatively affects your credit utilization ratio. This ratio compares the amount of debt you owe to the amount of credit at your disposal. Experts recommend keeping your overall credit card utilization below 30 percent. This demonstrates to lenders that you can use credit responsibly and can lend itself to higher credit scores.
WWD: What can consumers do to lower their debt? And improve their credit card scores?
D.M.: The path to building credit and lowering debt should be viewed as a journey, not a race. Making financial progress and improving financial health takes time, and lenders are looking for positive borrowing behavior and consistency.
For starters, we recommend creating a budget, which can be as simple as tracking your income and spending, determining your goals and then creating a plan to achieve them.
There are other creative ways to save money and reduce debt: for instance, opting to stay in. Our research reveals staying in at least once a week could save you an estimated $1,300 a year. That’s money that could be put toward paying down debt. Another option, how often do you watch cable TV? In the era of on-demand streaming, consider canceling cable and subscribing to Netflix or Hulu instead.
In terms of improving credit scores, the first step is knowing it. Knowing where you stand is paramount, and Credit Karma offers this for free to all of its members, as well as useful tools and tips to improve your credit. Lenders consider report information, including credit card utilization ratio, payment history, age of credit history and any derogatory marks on your reports to determine how likely you are to pay back your loans.
WWD: What else can consumers do to improve their credit score?
D.M.: Other ways to improve your credit score include: paying bills on time, every time, which proves your reliability and will boost your overall credit health. Be careful not to open too many cards within a short time period. When you apply for a credit card or loan it generates a hard-inquiry, which stays on your credit report for about two years and can have small negative effects on your credit. Applying for too many cards in a short period can also be a red flag to lenders as it may signal that you’re scrambling for cash.
Equally, think before closing old credit cards. Closing cards can lower your available total credit and increase your utilization ratio. And, stay patient and work on developing good habits that last. With a bit of effort, you should see your credit health improve over time.