The National Foundation for Credit Counseling is the largest and longest standing nonprofit financial counselling organization in the U.S. In 1989, the organization established National Credit Education Month each March. This was designed as a month-long stretch every year where Americans are encouraged to prioritize their finances, particularly around credit; whether that be paying off debt, getting finances more organized, or simply gaining a deeper understanding of credit and debt. In keeping with that spirit, your Pathfinder team thought it would be prudent to provide insight into some best practices to avoid debt.

 

Understanding Consumer Debt

By the end of 2024, U.S. credit card debt had reached a staggering total of $1.2 trillion with the average credit card interest rate hovering just over 23%. What does this mean for you? The average American household carries $9,214 in credit card debt and at 23%, the cost of that debt is over $2,000 per year in interest. The question, and one of our focuses as professional financial planners, becomes, how do we keep families and individuals out of this cycle of high-interest debt?

 

 Best Practices to Avoid Debt:

Here are a few habits and tips we recommend as financial planners to help you utilize credit wisely and avoid debt.

1. Set a budget and stick to it. is your best tip to avoid debt. Tracking your spending and sticking to a budget can help you avoid overspending on your credit card. Make sure to monitor your purchases regularly and compare your expenses to your income to ensure you’re not living beyond your means.

 

2. Know your credit card terms. It’s important to understand your credit card’s terms—especially the interest rate, fees, and due dates. Some cards offer 0% APR introductory periods or rewards programs but knowing when these perks expire and how the interest rates change afterward can save you from unexpected costs.

 

3. Avoid carrying high balances. If you do need to carry a balance, try to keep it as low as possible. A high balance can quickly rack up significant interest charges, making it harder to pay off. As a rule of thumb, avoid charging more than 30% of your available credit limit to keep your debt manageable and your credit score healthy.

 

4. Build an emergency fund. Having an emergency fund can help you avoid using credit cards when unexpected expenses arise. By saving for emergencies, such as car repairs or medical bills, you will be less likely to rely on your credit cards and accumulate debt when the unexpected happens.

 

5. Pay off your balance in full every month. The easiest way to avoid interest charges and debt is to pay your credit card balance in full each month. When you do this, you will only pay for what you spent, and you won’t accumulate interest. This ties back to setting a budget, sticking to it, and living within your means. Making only the minimum payment on your credit card balance may seem like an easy way to handle your bills, but it’s one of the quickest ways to accumulate significant debt.

 

Using Credit as a Financial Tool

Credit cards can be a valuable financial tool if used wisely, but they also come with risks. By understanding the basics of credit cards and adopting smart spending habits, you can avoid debt and even leverage the benefits they provide. The key to avoiding debt is making informed decisions, paying off your balance regularly, and using your credit card for planned purchases. In addition to helping you maintain financial health; good credit habits will improve your credit score. A strong credit score is crucial when it comes to buying a home or securing other important loans, as it can lead to better interest rates and more favorable terms. By following these simple steps, you’ll not only avoid the trap of high-interest credit card debt but also build a solid foundation for future financial goals.

At Pathfinder Wealth Consulting, we believe that this foundation begins with a personalized financial plan.  Whether you’re just starting out with your first job, going through a major life change like getting married, starting a family, or gearing up for retirement, a financial plan will help identify priorities and provide clarity around your financial goals.

Take the first step towards a secure financial future by scheduling a consultation with one of our experienced Wealth Advisors. Let us tailor a financial plan that aligns with your goals and allows you to enjoy your journey instead of worrying about the future. Contact us today to get started!

 

 

Advisory services offered through Commonwealth Financial Network®, a Registered Investment Advisor.