Americans' credit card debt hits $1trillion: How to avoid being a defaulter

With 70 million more credit-card accounts added to the economy, Americans' credit card debt hits $1 trillion. Here's how you can avoid being a defaulter.

According to the Federal Reserve Bank of New York's household debt report released Tuesday, Americans' total credit-card bill increased to $1.03 trillion from $986 billion in the first quarter. Find out some common mistakes to look out for so you can steer your finances toward long-term health.

Knowing exactly how much you're making and what you can afford to spend helps you manage your financial commitments better.

Consumers' continuing willingness or need to meet the rising prices has them resorting to credit cards. The proportion of credit card debt that was at least 30 days past due grew to 7.2% in the second quarter, up from 6.5% in the first. According to New York Fed figures, this is the highest level since the first quarter of 2012.

Researchers say there is evidence of "some stabilization" in the quantity of past-due credit card bills, but the figures nevertheless show that consumers are piling on additional debt just as debt loads are predicted to rise in the autumn.

Here's how you can continue using your credit cards to make payments but avoid being defaulters.

1. Plan a budget

Many Americans underestimate how much they spend each month, but knowing exactly how much you're making and what you can afford to spend helps you manage your financial commitments better.

When nearing debt, the first step is to stop your luxurious expenditures. Analyse your conveniences like a pricy gym membership or your grocery deliveries and settle yourself on the necessities.

Also, practice cash stuffing and keep an emergency fund around. Prepare labelled envelopes of your debts and every time you receive money keep the necessary amount and stuff the rest of the money in those envelopes. Stashing aside a net income of three to six months as an emergency fund can be really helpful for rainy days and sudden large purchases.

2. Debt Snowball and Avalanche Method

The snowball method of paying down your debt is when you focus on wiping out the smallest amount first. After that, you move on to the next smallest one, so like a snowball rolling down the hill you'll gradually make bigger and bigger payments.

Similar to the earlier approach, here you pay off the amounts with the highest interest rates first. It has proved to be a faster and cheaper method than the snowball method.

3. Keep a low debt-to-credit ratio

Your debt-to-credit ratio, also known as your credit usage rate, is the percentage of available credit that you are utilizing (your credit card balance) relative to the total amount available (your credit card limit).

Maxing out your credit cards reduces the flexibility of your cash flow and can rack up interest charges faster than you can pay your balance off.

Purchasing a 0% APR (Annual percentage rate) credit card can help keep your credit card balance low when financing debt or making new purchases.

Another way can be finding cards that offer a 0% introductory period of preferably 15 to 18 months and transferring all your outstanding credit card debt to one account where you'll have a simple payment every month end and won't have to pay interest.

There are always chances of falling into a credit card debt trap but preventing it through better planning and expenditure can help your cards have a longer financial life.