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With the Great Recession behind us, Americans seem to be opening their wallets once again. According to the Federal Reserve, consumer credit went up in May by an amount not seen in a year.
While robust spending may be good news for the economy, it remains to be seen whether it is a positive for the personal finances of individual families. The real question is: Have we learned from the mistakes that led to the Great Recession?
Federal Reserve: credit card usage is up
The recently released Federal Reserve report is a snapshot of a growing economy. It found that overall consumer borrowing jumped $19.6 billion in May 2013, which was the biggest increase in a year. For comparison, borrowing increased $10.9 billion in April 2013. Overall, total borrowing reached $2.84 trillion, an amount the Associated Press says is a record.
Rising student loans have been getting a lot of press lately, but credit cards are a significant portion of consumer spending as well. Revolving credit saw a 9.3 percent annualized gain to reach $856.5 billion in May. Credit card debt is now at the highest level since September 2010 with $847.1 billion outstanding.
Using your credit cards wisely
Credit card debt hasn't quite hit the levels it was at pre-recession, but it is inching closer. And while the recession seemed to have been triggered by the deflated housing market, it could be argued the source of the problem was the mentality of buying too much and saving too little.
If you are ready to break out the credit cards again, here are three ways to avoid the trap of overspending:
- Compare credit card offers: When the recession hit, low-intro-APR credit cards seemed to dry up. Fortunately, with the rebounding economy, even zero-APR credit cards are making a comeback. If you haven't compared credit cards recently, it's time to review your current interest rate and see if there is a better card available.
- Stick to a budget even when using credit cards: One mistake people may make with their credit cards is charging purchases on the fly without regard to how much they are spending overall. Instead of relying on fuzzy math in your head, write down your purchases and categorize them throughout the month. Then, just like you would with cash, when you hit your budget limit for a certain category, stop spending.
- Use credit card financing wisely: Similarly, don't pull out the credit card and charge new appliances or your vacation without knowing if and how you'll pay it off. Low-interest credit cards are convenient and an easy way to spread out a major purchase but these and zero-APR credit cards typically see their promo periods end at some point. Before committing several thousand to the credit card, be sure you can pay off the balance before the interest jumps to double digits.
Americans are using their credit cards again which means we're feeling good about our finances and the economy. Now we just need to be smart to keep the credit card blues at bay.