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Consumers Acknowledge 'Biggest Threat to Building Wealth' Despite Half Engaging in the Pitfall

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The Cost of Consumer Debt: A Threat to Building Wealth

Consumer spending has shown remarkable resilience in the face of persistent inflation, but this has come at a significant cost. To cope with rising prices, Americans have accumulated record levels of credit card debt. Not only have balances increased, but approximately 47% of cardholders are carrying debt from month to month, creating a cycle that is difficult to break.

The Burden of Credit Card Debt

Credit card debt, as highlighted by Ted Rossman, senior industry analyst at Bankrate, is easy to accumulate but challenging to eliminate. A new report from Edelman Financial Engines reveals that 39% of adults consider credit card debt as their biggest threat to building wealth. Surprisingly, even among wealthy respondents, 32% share the same concern.

The Financial Health Impact

Unlike other types of debt, such as mortgages or student loans, credit card debt is not backed by an asset that can potentially appreciate over time. As Rod Griffin, senior director of consumer education and advocacy for Experian, explains, excessive credit card debt can erode a person's financial health. However, the prolonged period of higher prices has forced consumers to deplete their savings and rely on credit.

The Alarming Debt Figures

According to a November report from the Federal Reserve Bank of New York, Americans collectively owe a staggering $1.08 trillion on their credit cards. Simultaneously, credit card rates have surged due to the Federal Reserve's series of rate hikes, including four in 2023. The average annual percentage rate has risen from below 15% last year to over 20% today, reaching an all-time high.

Trade-Offs and Long-Term Financial Goals

Consumers often turn to credit cards because they are more accessible than other types of loans. However, this spending comes at the expense of long-term financial goals. Kelly O'Donnell, chief client officer at Edelman Financial Engines, emphasizes the importance of setting long-term goals and working backward to avoid short-term budgeting pitfalls.

Using Credit Cards Wisely

While credit card debt can be detrimental, using credit cards responsibly can help achieve financial goals. Consumers who pay their balances in full and on time each month, and maintain a utilization rate below 30% of their available credit, can benefit from credit card rewards and a higher credit score. This can lead to lower-cost loans and better terms, which are advantageous for major milestones like purchasing a house or qualifying for an apartment rental. In conclusion, the decisions consumers make regarding credit card usage determine whether it becomes a threat to building wealth or a tool to achieve financial goals. It is crucial to be mindful of the potential pitfalls of credit card debt and to use credit cards responsibly to avoid long-term financial setbacks.

Consumer Debt and Its Implications for New Business Formations

The resilience of consumer spending in the face of inflation has led to record levels of credit card debt, an issue that new businesses must consider. The ease of accumulating credit card debt, as noted by Ted Rossman of Bankrate, coupled with the difficulty of eliminating it, poses a significant threat to wealth-building for many Americans.

Debt Burden and Financial Health

The Edelman Financial Engines report reveals that credit card debt is considered the biggest threat to wealth-building by 39% of adults. This concern is shared by even the wealthy, with 32% echoing the sentiment. Unlike other forms of debt, credit card debt isn't backed by an appreciating asset, as Experian's Rod Griffin points out. This can erode financial health, especially as consumers deplete savings and rely on credit due to inflation.

Alarming Debt Figures and Trade-offs

The alarming $1.08 trillion owed by Americans on their credit cards, as reported by the Federal Reserve Bank of New York, coupled with surging credit card rates, presents a challenging landscape for new businesses. Consumers often turn to credit cards due to their accessibility, but this comes at the expense of long-term financial goals, as Kelly O'Donnell from Edelman Financial Engines highlights.

Responsible Credit Card Use

Despite the potential pitfalls, responsible credit card use can aid in achieving financial goals. This involves paying balances in full and on time each month and maintaining a low utilization rate. This can lead to benefits such as credit card rewards and a higher credit score, leading to lower-cost loans and better terms. In essence, the decisions consumers make about credit card usage can impact new business formations. It's essential for new businesses to understand the landscape of consumer debt and its potential impact on their operations and growth.
Story First Published at: https://www.cnbc.com/2023/12/06/poll-credit-card-debt-is-the-biggest-threat-to-building-wealth.html
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