The successful financial management of a household in a day of easy credit depends to a large degree on controlling the credit load you acquire. The amount of money being paid on credit card debt compared with income is a critical figure that household managers often don’t know, or simply ignore and it can lead to financial disaster.
Figures compiled by government overseers show that in 2001, 11 percent of all American households had debt that was using up more than 40 percent of their income. The ratio is even greater in low-income families, which have a greater tendency to use credit when cash is short. The 2001 study was conducted by the Survey of Consumer Finances, an arm of the Federal Reserve. Results indicated that 7 percent of all the households contacted had a payment at least 60 days overdue. Only 45 percent of the credit card-holding households surveyed did not carry over a balance on their accounts.
Using some smarts at the beginning of the credit card pipeline pays. But even this common sense approach often is overlooked. Only a third of those who responded to the survey said they compared the many offers being made to potential credit card holders before acquiring a card.
The low figures may reflect how individuals view credit purchasing in the overall management of their resources. Those who simply use credit as a convenience in purchasing, with no intent ever to have a balance, may see no need to compare. Even so, it pays to look at the fees, terms and special features of the many credit offerings.
The level of financial knowledge in a household often mirrors how finances are managed. The survey found that lower levels of knowledge often correlated directly with less efficient handling of credit debt.
Debt management and savings also had direct correlations. Families that had control of debt payment also were more likely to make regular payments into a savings account. Four-fifths of all the families surveyed reported a savings account, but fewer than half of these made regular contributions to their savings out of each paycheck.
Maintaining an emergency fund to cushion against financial shocks also tied sound credit management to being prepared. Many studies, including those done by the Federal Reserve, consistently show that more than half of the country’s households are unprepared, even for a moderate period of unemployment. Again, general understanding of financial principles lagged in those families least prepared.
Planning ahead for such things as vacations, college expenses, medical needs, replacement of vehicles and other large-tag items also should be considered when credit use is a factor. One area that should call for some particularly thought is the prospect of retirement. A third of those surveyed did not know how much they needed for reasonable retirement and many who had looked ahead were far short of the amount financial experts suggest.
The survey emphasized the need for making credit buying a significant factor when analyzing family finances across the board. And it definitely made a strong connection between knowing about finances and managing them. That can be taken as a word to the wise.