Nearly 25% of Americans are going into debt to pay for necessities like food
American have an average of $6,506 in credit card debt, according to a new Experian report out this week. But which expenses are adding to that balance the most?
A full 23% of Americans say that paying for basic necessities such as rent, utilities and food contributes the most to their credit card debt, according to a new survey of approximately 2,200 U.S. adults that CNBC Make It performed in conjunction with Morning Consult. Another 12% say medical bills are the biggest portion of their debt.
That makes sense, given that day-to-day costs continue to soar. Middle class life is now 30% more expensive than it was 20 years ago. The cost of things such as college, housing and child care has risen precipitously: Tuition at public universities doubled between 1996 and 2016 and housing prices in popular cities have quadrupled, Alissa Quart, author and executive director of the Economic Hardship Reporting Project, tells CNBC Make It.
It's now common to be just scraping by. A majority of Americans have less than $1,000 in savings and more than 70% of U.S. adults say they'd be in a difficult situation if their paycheck was delayed by a week, according to a survey of over 30,000 adults conducted by the American Payroll Association released in September.
Most debt is derived from spending on extras
Basic necessities and healthcare costs may be sending some people into debt, but more people point to spending on non-essential items like clothing and entertainment as the main culprit. In CNBC Make It's survey, 32% of people said their discretionary spending was the No. 1 cause of their current credit card debt.
Another 9% say the majority of their debt comes from paying for travel. Americans spend an average of $483 a month on non-essentials such as dining out, entertainment, luxury items and vacations, Schwab's 2019 Modern Wealth report found.
Why it's important to keep balances low
No matter what you're spending on, it can be more expensive than ever to let that monthly balance roll over. That's because the average credit card APR has never been higher: Rates are currently sitting at 17.73%, according to CreditCards.com. Because of that, the interest accrued on monthly balances can quickly add up.
Let's say you have the average credit card balance of $6,354. If your card charges the average APR and you pay the minimum each month (3%, which is roughly $190 to start) you'd stay in debt for over 17 years and put more than $5,800 toward interest.
How to reduce your debt
If you already carry a balance and are looking to pay it down, it may be worth considering opening a new credit card that allows you to transfer over your balance without accruing more interest.
The key is to look for one that doesn't charge you a balance transfer fee and offers an extended 0% APR period. Ordinarily, cards that allow balance transfers can charge a fee of 3% to 5% to move your balance from one card to another, which can add up.
A good option may be a credit card like the Amex Everyday, which offers a 0% APR on balance transfers for 15 months and no transfer fees.
You also may want to trim your expenses or pick up some part-time work. "There are only three things you can do if you are not happy with your financial situation: Make more, spend less or a combination of the two," Saundra Davis, a financial coach and adjunct professor at Golden State University, tells CNBC Make It. "There is no other magic."
There are only three things you can do if you are not happy with your financial situation: Make more, spend less or a combination of the two. There is no other magic.
Saundra Davis
financial coach and adjunct professor
If you do want to reduce your spending, the first step is to get organized about what you purchase, Davis says. Be really clear with yourself about what you want and what's achievable. And be realistic, she says. Don't expect yourself to go immediately from saving nothing to putting away $400 a month.
Start small. Save $5 and actually put it into savings, or cook dinner once a week and take the money you would've spent going out and deposit it.
Davis uses her daily coffee habit as a starting point. She doesn't give up her coffee, but instead only buys it at her local coffee shop if she can afford to save that amount as well. For example, if Davis pays $3.50 for coffee, then she matches that by putting $3.50 in a savings account too.
"If I can't afford $7, I don't have any business being in there," Davis says. "If I can give $3.50 to [my coffee shop], why can't I give $3.50 to myself?"
You can do this with a number of other frequent purchases as well, such as dining out or treating yourself to a movie. "It truly is about changing your mindset and then creating different habits," Davis says.
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