Can consumers break the credit habit?

For most people, it appears that old, poor spending habits die hard.
A recent CardHub study reveals that, although consumers repaid almost $35 billion in credit card debt during the first quarter of 2015, they accumulated $32.1 billion in new debts from April through June, almost wiping out their first-quarter pay-down. This marks the largest second-quarter spending spree since the study was initiated in 2009.
The Great Recession sent a message to credit-card holders, cautioning them against accumulating massive debts, and in the immediate quarters following the onset of the downturn there was a marked progression in consumer spending habits. However, data from seven of the 10 most recent quarters give cause for concern that the message did not take.
At this rate, researchers project that outstanding credit card debt will surpass $900 billion by the close of 2015, a net increase of more than $60 billion. According to CardHub, this would bring the average indebted household’s debt balance to $7,813 — the highest amount since the Great Recession — with consumers inching towards a concerning level at which delinquency rates increase dramatically and debt becomes unsustainable.
Still, it will be difficult to determine the state of American consumer debt levels until the holiday spending spike that typically occurs during the fourth quarter every year.
David Edwards, president and wealth adviser at Heron Financial Group, has observed the trends of consumers who find themselves overwhelmed by credit card debt.
“People often get themselves into debt because they have a big unplanned expense or move to a new home and decide to buy a lot of furniture,” Mr. Edwards said. “Oftentimes, a person will play the game of, ‘Oh, I just got the chance to do a free transfer to another card. It’s free money, so I’ll just keep spending it.’”
Mr. Edwards finds that most people have not improved their spending habits even though costs are rising while income levels have remained relatively stagnant since 1990. Furthermore, with the recessionary years behind us, Mr. Edwards finds that both banks and consumers are more lax with regard to their spending habits.
“The mortgages that people defaulted on have disappeared, and now that we are six years beyond the recession, banks feel comfortable giving out plastic cards,” he said.
Mr. Edwards advises consumers to look themselves in the mirror and do a hard reality check about the amount of credit card debt that they have accumulated.
“If you have five credit cards with $25,000 on them, and you can only spend $1,000 a month to pay off the debt, rank the cards from highest rate of interest to lowest,” Mr. Edwards advises. “Put the minimum on the first four and the most you can for the fifth, and pay that off first. Then start throwing your money at the next most expensive card until it is paid off and continue doing the same thing until they all are.”
However, once a credit card is paid off, he advises consumers not to cancel their cards, but to put them in a lock box where they are not easily accessible.
“Part of your credit rating is dependent on the percentage of your total credit line that you’re using,” he said.
Therefore, it is more advantageous for consumers to pay off their debt over the same number of cards, which in turn will cause their credit rating to start going up automatically. This not only reduces credit card interest, giving consumers more cash to pay down the principle, but it is good for their self-esteem as well.
“There is a psychological boost from seeing zeros on your credit card statement,” Mr. Edwards said. “It encourages consumers to keep their debts down.”