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Credit Counseling: A Closer Look

Financial problems affect everyone, sooner or later. If you’re struggling with credit card debt, know you’re not alone. 71% of 330,000,000 Americans have some credit card debt. But a manageable amount of debt isn’t a terrible thing. After all, we need credit cards to shop online, to handle emergencies, and to buy plane tickets. The real problems with credit card debt are high interest rates on credit balances, and overspending behaviors that can affect us all. Today, we’re going to look at the value of credit counseling, and interesting credit statistics. Finally, we’ll talk about adjustments to spending habits that need to happen if you’d like to get out of credit card debt.

What is Credit Counseling?

We think Investopedia.com says it best: “The goal of most credit counseling is to help a debtor avoid bankruptcy. Many counseling services will negotiate with creditors on the borrower’s behalf to reduce interest rates and late fees.”

Credit counseling services provide consumers with guidance about their credit, teach them about budgeting and explain money management. Know that:

  • Credit counseling is a service: it won’t reduce the amount of debt you owe.
  • A counselor, or team of counselors will work with you to create a strategy to manage your credit and pay off debt.
  • Sometimes credit counseling is coupled with a debt management plan (DMP) at an additional cost.
  • If you’re considering credit counseling, do your research and find one that is in good standing with the Better Business Bureau (BBB).
  • Also, be sure they’re accredited by the National Foundation of Credit Counseling (NFCC) or the Financial Counseling Association of America (FCAA).

However, one can hear all the advice and budget planning in the world, and not make any changes to their spending problems or credit debt. The first step towards financial freedom from credit cards is to stop overspending with them. 

Do People Overspend With Credit Cards?

Absolutely! Consumers spend far more money when they have access to credit cards.

There are two primary reasons for this spending bump:

  • The first is short-term — we can purchase items with credit cards if we don’t have cash on hand.
  • In the long-term, when not paid immediately, the interest and other fees for credit card debt can be significant, even overwhelming.

It’s almost like we overspend twice!

That’s not to say that credit card debt is evil, or that you’re a horrible person if you’ve made the common mistake of getting in over your head. We’ve all been there. And to prove that you’re not the only one spending more with credit cards, check out these statistics.

US Credit Card Debt Statistics for 2020

Per Value Penguin, the average American household is responsible for $5,700 in credit card debt as of February 2020.

And:

  • Today’s total US Consumer Debt totals $3.9 trillion.
  • More than 40% of all American households carry credit card debt.
  • Families in Alaska and Hawaii typically owe the most, while Ohio families generally owe the least.
  • And males tend to carry significantly more debt than females, roughly 20% more.

Interestingly, the average credit card debt for US residents has been rising for a decade. However, the percentage of people holding credit cards is declining. Plainly put, fewer individuals have cards, but they are spending more.

Why We Get Too Deep in Credit Card Debt

Frankly, it’s easy to get in debt. Credit cards are one of a few payment options for individuals shopping online. Furthermore, we don’t feel emotionally tied to a budget when we use them, whether online or in person. It’s a recognized phenomenon known as “coupling.”

Coupling and Credit Spending

Let’s imagine a career woman spending a day at a salon. We’ll call her Susie.

  • Susie brought $100 cash to spend at the salon today.
  • Susie is aware of the cost of every service she uses.
  • She plans her spending carefully, and thinks about tipping the salon professionals.
  • Once that $100 is spent, she leaves, feeling fantastic!

Now imagine the same scene, except Susie brought her credit card. She’s not bound to that $100 budget. According to MIT research, she’ll probably spend $200 on her credit card. Six months later, making minimum payments, administration fees and interest, she’s spent even more money on her spa day.

The Psychological Phenomenon of “Coupling”

When we spend cash, we are immediately aware of the cost. It almost hurts us physically. That feeling has a name. It’s called “coupling.”

When we use credit cards to make a purchase, we don’t feel that pain until it’s time to pay the bill. We are dis-associated with the actual cost. In psychological circles, it’s known as “decoupling.” But eventually, those chickens will come home to roost, and we’ll need to face those credit card debts.

Retailers Are Not on Your Side

Access to credit cards changes our spending habits if we’re not careful. Part of the problem is that Americans are constantly bombarded with advertising. It’s everywhere. Can you tally up the advertising you’ve seen today on:

  • Television
  • Social media
  • Video games
  • Direct mail
  • Radio
  • Newspapers

It’s a great deal of marketing. As of 2018, the US advertising industry is worth $118 billion. And there’s a good reason businesses spend this kind of money on marketing, it works.

The more advertising we face, the more likely we are to feel a need for a product, and the more likely we are to use credit to buy it. We might be able to refuse a gorgeous pair of sneakers for a while, but eventually consumers are worn down. We become tempted. We bust out that plastic and make the purchase. We’re only human, after all!

Once the purchase is made, if it’s not paid off in full and on time, it costs more. The longer we owe on a purchase, the more it costs. But that’s not all!

Credit Card Debt Costs More Than Interest

Credit card interest is expensive, and we all know how interest works. But there’s more.

Even if we don’t have cash on hand for a purchase, credit cards make it easy to order whatever we want. Add marketing incentives like free shipping and other “buyer rewards” like coupons, and we are tempted even further and encouraged to spend even more.

But unless we pay for the purchase almost immediately, we end up paying interest, which can be as much as 24.99%. That’s nearly $250 a year for every $1,000 in credit card debt. 

Even if we pay back the credit card quickly, consumers may still be on the hook for:

  • Annual membership fees
  • Identity theft fees
  • Credit protection costs

Then, if a payment is made late, we’re charged as much as $35 or $40.

Some creditors also charge a fee if we accidentally spend a few dollars over our limit, rather than refusing to process the sale. Debt management can become a real challenge!

When Credit Counseling and Debt Settlement Can Help

DebtBlue offers debt settlement for folks who need help taking control of credit card debt. In a nutshell, credit card settlement reduces what you owe and helps you resolve your debts.

However, it won’t cure the spending habits that led to overwhelming debt, so consumers need to change their shopping and spending habits to stay out of the debt spiral.

Financial problems are bound to affect everyone, sooner or later. You’re not alone! The question is, when they hit you, how will you react?

Check out our blog for more great money management topics. And contact us if you’d like to learn more about debt settlement or how debt settlement programs work. 

Related Reading & Resources:

Investopedia.com: How Do I Stop Emotional Spending?

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