The increasing cost of daily necessities—most noticeably
groceries—is again closing the gap between income and expenses. With few places
to make cuts, many people are resorting to credit cards to make ends meet.
According to data from the Federal Reserve, consumers' total credit card debt
reached $1.03 trillion in the second quarter of 2023, the highest amount on
record. Though the use of plastic may work in the short-term, be cautious about
using credit cards as a long-term solution to cash-flow problems.
Even if you're still able to
make the monthly payments, relying on credit cards could put you into a danger
zone. For example, are you charging more than you used to? Or carrying over part
of your debt into the next month when you used to pay off the full balance each
month?
If your credit card debt becomes so high that you can't even
make the minimum payment within 30 days of its due date, your credit score could
drop by as much as 100 points. That late payment will stay on your credit report
for seven years, making it harder to get loans in the future.
Recession-, inflation-proof your finances
If you're starting to feel the pinch of higher prices, here are a few ways to protect yourself from serious financial trouble:
- Figure out how much you're spending on gas, groceries, and other necessities every month compared with a year ago. You may not even realize you're spending more, because you haven't changed your lifestyle.
- Look for reductions in income. For example,
retired consumers may find they have to tap into their principal to achieve the
same annual income they used to get from the return on their investments.
- Revise an outdated budget using the information you gather. Identify where
you can make cuts. Start with any remaining luxuries but be prepared to
economize on necessities.
- Plan for further price increases. Looking at your
new budget, ask yourself how you would make ends meet if gas went up another
dollar or groceries cost you an additional $75 per month. Recession- and
inflation-proofing your finances is all about planning, as opposed to reacting.
If you're already watching your debt climb and you can't see
any alternative to using credit cards, you may want to talk to a credit
counselor. They can show you how to reduce expenses or increase income. They are
also familiar with all sorts of free or low-cost assistance programs. You can
find a list of agencies at the National
Foundation for Credit Counseling.
If you're not in financial
trouble now, use this time to be proactive. One of the best things you can do
is to start or increase an emergency fund. Then tap it, rather than credit
cards, when you need help making ends meet. And remember, the people at your
credit union are here to help. Don't wait until you're in deep trouble to ask
for a financial checkup. The earlier you ask for a review, the better the
outcome.