The importance of a budget has never been as critical as it is today. It has become apparent the economic recovery will be extremely slow and the potential for another economic downturn is very real according to leading economists.
The use of credit cards for everyday purchases is a relatively new phenomenon. As late as the 1980s, credit cards were most often used for special purchases with the goal of spreading out payment over several months.
Gradually the use of credit spread and credit cards were touted as a way to manage personal finances and to manage cash flow in a budget. By the 1990s only those with horrible credit did not have a credit card.
Competition for New Customers
The competition for new customers was fierce among lenders and the standards for issuing credit were lowered as the focus was on adding as many new credit card users as possible.
Lending banks merged, were taken over and bought out and by 2000 most credit cards in the U.S. were provided by only a few large financial institutions.
The stock market was booming, home prices were soaring and the practice of flipping out a credit card to pay for anything from a new refrigerator to a $5 lunch was common practice.
Financial experts warned of the dangers of using too much of your spending limit on a credit card and consumers were aware of the need to pay on time to maintain that all-important good credit rating.
All of the positives to using credit were based on the premise that markets would continue to flourish and consumers would continue to be financially solvent.
Those with bad credit weren’t left out as sub-prime credit lenders entered the marketplace along with the sub-prime mortgage lenders.
A Debt Crisis
Consumers did not expect an economic crisis to lead to a personal debt crisis or to highlight the importance of a debt budget.
There were a few weak warnings by economic experts but credit cards were still easy to get and could be used for almost anything you wanted to buy or to pay for anything you wanted to do.
Instant gratification was a wonderful way to live and credit cards made it possible to buy now and worry about paying later. It was accepted that if you had a low income or lost your job you might have problems paying your debt.
There were many stories of problems for people who had unexpected medical expenses or a divorce that damaged their ability to pay debt.
When the economy fell almost overnight from a prosperous booming market to an economy in freefall, consumers were thrown into a debt crisis very quickly.
For years, homeowners could pull equity from their property to pay off high credit card bills. The home prices kept going up and thus equity increased year after year. Unfortunately, consumers taking loans against that equity also increased.
As housing prices began to fall and unemployment numbers started to rise, many consumers found themselves using credit cards to replace lost income. This added to their debt at a time when they could least afford to pay off debt.
The immediate result was a rise in numbers of personal bankruptcy filings and that number has continued to increase each year.
Focus on Debt Repayment
Surviving a bad economy and job loss requires cutting back expenses and increases the importance of a debt budget. As you already know, credit card debt became a huge problem for many people.
The debt they had accumulated before the economic crisis was often increased by the need to use credit cards to pay for daily expenses during a difficult financial time.
Adding to the financial problems was the passage of new credit card regulations. Meant to help consumers and protect them from the practices of predatory lenders, the implementation of the new laws was delayed for over a year.
During that year many lenders changed the terms on their credit card accounts. Interest rates were drastically increased and spending limits were lowered at the same time. This added more stress on those struggling to meet even the low minimum monthly payments on their debt.
Summary
Today consumers are focused on the importance of a debt budget. They are not willing to make minimum payments that will result in many years and high finance charges to pay off credit card debt. They know their personal finances may not survive that path.
Some of the most popular new televisions shows and columnists are economic experts such as Suze Orman, Dave Ramsey and Gail Vaz-Oxlade. These experts have brought the message of debt elimination to the public and focus on finding real life methods to eliminate debt.
The importance of your debt budget is accepted as fact today by consumers who need to lower their monthly expenses and their debt.
To that end, consumers are following advice from the experts above and crafting a personal budget that focuses on repaying debt as quickly as possible to eliminate high interest rates charged.
This is done by paying extra amounts monthly on the highest APR debt and then applying that full payment to the next highest APR debt after the first debt is paid.
