In this, the age of prodigious athlete contracts, staggering CEO bonuses, and runaway budget deficits, millions are tossed around on newscasts and in everyday conversation seemingly without care. The result: We've become desensitized to the true value of large amounts of money. You might therefore be inclined to brush aside the fact that American consumers are projected to incur $43.5 billion in credit card debt during 2012 for the second consecutive year. That, however, would be a grave mistake.
Simply consider the fact that a Hawaiian island recently sold for "only" $500-600 million and the state of California -- where more than one out of 10 Americans lives -- has budgeted less than $70 billion for K-12 public school education funding in 2012-13, and it's perhaps more clear just how out of control our spending has become.
The Problem
At the heart of the problem is the notion that economic recovery allows us to revert back to pre-recession spending habits. Everyone understood the need to cut back during tough times, you see, but many of us cannot comprehend that the pre-recession economy was floating high thanks to a real estate bubble that burst with dramatic results. The resulting economic carnage therefore wasn't a momentary dip in the road, but rather the beginning of a new normal.
That is why we should be making a more concerted effort to cut back instead of seeming content with the fact that we ended 2009 with a net decrease in credit card debt before proceeding to incur more debt with each passing quarter thereafter.
Still, regardless of economic perception, you might assume that more people would adhere to the basic principal of spending less than they bring in each month. This is obviously difficult during periods of economic difficulty or for those who are unemployed, but the projected increase of credit card debt after years of being in a recession is not being driven by people experiencing hardship. Rather, it's those who are employed and still have access to credit who are racking up the big balances. Perhaps more of the blame should therefore be ascribed to the lack of financial literacy in our country. Forty-two percent of people give their personal finance knowledge a grade of "C" or worse, according to the National Foundation for Credit Counseling's 2012 Financial Literacy Survey, and 80 percent say they could use some professional help dealing with everyday finance questions.
It's therefore no wonder that we're managing our money poorly, and while the financial literacy programs that are popping up all over the place should help in the long term, we need to escape debt and alter spending habits now if we are to ward off a double-dip recession.
The Solution
First of all, we obviously need to rein in spending, and that requires improved budgeting. My advice is to rank your expenses in order of importance, with things like food, insurance, and emergency fund contributions atop the list, and the likes of fancy TV and cell phone packages decidedly lower. Then simply eliminate any expense that will take you over the amount you can comfortably afford to spend each month.
Then there's the issue of existing debt. If you have excellent credit, the best solution is to transfer your balance to a 0 percent credit card and thereby give yourself more than a year to pay down what you owe without interest. Using a credit card calculator will enable you to identify the card that will help you save the most and escape debt soonest, but if you have around $7,000 in credit card debt like the average household, you're looking at saving around $800 with the Slate Card from Chase, which gives you 0 percent for 15 months without charging a transfer fee.
Using one credit card to revolve debt and another to make everyday purchases also lends itself well to budgeting. Since spending within your means entails paying for everyday purchases in full each month, the presence of finance charges on your everyday spending card will serve as a built-in reminder to cut back.
Hopefully, enough people will heed this advice and change the way they think about spending so that future examinations of credit card debt will reveal more encouraging trends.
Odysseas Papadimitriou is the CEO of the credit card comparison website Card Hub and the personal finance social network Wallet Hub.