An economic divide is widening in America, as a significant number of higher-income individuals find themselves living paycheck to paycheck and relying on credit cards to make ends meet. According to a recent survey by personal finance software company Quicken, 32% of Americans earning at least $150,000 a year are currently living paycheck to paycheck. This is in addition to the 36% of individuals earning between $50,000 and $150,000, and a staggering 55% of households earning less than that who report the same financial struggles.
The survey results highlight that there is a large group of hard-working people who are still struggling financially. Eric Dunn, CEO of Quicken, expressed his concern over the compounding problems faced by this group and the fact that many of them are relying on credit cards they may not be able to afford.
Credit card usage in the United States has been increasing as inflation rates have risen. According to the New York Federal Reserve, credit card balances exceeded $1 trillion in the second quarter of 2023. With everyday expenses becoming increasingly difficult to afford, credit cards have become a necessary tool for some individuals. However, relying too heavily on credit cards comes at a cost.
The Quicken survey found that 46% of higher-income groups are more dependent on their credit cards than ever before. This is compared to 40% of middle-income groups and 39% of lower-income groups. Additionally, nearly a third of individuals earning $150,000 a year or more admitted that they would not be able to pay off their credit card balances by the end of the year.
Accumulating credit card debt and being unable to pay off balances in full and on time each month can lead to significant interest charges. Over time, this debt becomes more challenging to pay off, and individuals may also see their credit scores suffer. This can have consequences when applying for loans or insurance, as lenders and other companies consider credit scores.
To tackle this cycle of reliance on credit cards and living paycheck to paycheck, individuals can take a few steps to improve their financial situation. Building and sticking to a budget is essential, as it provides visibility into income and fixed expenses. A budget allows individuals to assess how much they can allocate to discretionary spending and savings for emergencies and retirement.
Additionally, it is crucial to prioritize paying down debts, including credit card balances. Setting up automatic payments on credit cards can ensure that deadlines are never missed. If struggling to afford payments, individuals should create a strategy to pay off their debts gradually. For example, using the avalanche method by tackling the highest-interest debt first can reduce overall interest charges over time.
Furthermore, creating an emergency fund is a crucial step to avoid living paycheck to paycheck. Having savings set aside for unexpected events, such as job loss or large expenses, provides a financial cushion. Experts often recommend saving three to six months’ worth of expenses in an emergency fund. These savings can be placed in a high-interest savings account, but individuals should be aware of any penalties for early withdrawals.
In conclusion, the economic divide in America is widening, with a significant number of higher-income individuals living paycheck to paycheck and relying on credit cards to make ends meet. To break this cycle, individuals should build a budget, prioritize paying down debts, and create an emergency fund. Taking these steps can help individuals regain control of their finances and reduce reliance on credit cards.