The statistics of debt in the USA today does not make great reading. There are households that are completely debt-free which makes the average of around $90,000 per house extremely disturbing. If those who had no debt were eliminated the average figure leaps to $130,000. An obvious observation is that families are wasting money because they are paying thousands of dollars a year on interest repayments. In some cases it represents around 10% of the annual average income!
There is a valid argument that mortgages represent positive debt; they are the means by which people can fund the purchase of real estate which is a primary way to increase the family assets. Of the $90,000 quoted above, the average mortgage debt is two thirds of that figure but that still leaves $30,000. Student loans are a significant part of the remainder with credit card debt averaging $5,500. Unfortunately once the debt free portion of the population are excluded that credit card figure leaps to over $15,000 all of which incurs a high rate of interest.
Even if you accept that student loans are a positive form of debt because it finances education that can result in better career prospects, none of the credit card debt can realistically be regarded as good. Prior to the recession everyone was full of optimism with real estate values rising month by month and credit card companies aggressively searching for more customers, attracted by 0% balance transfers on a regular basis. Many citizens held several cards and when the recession struck and jobs were lost, many were forced to default. That obviously impacted on individuals’ credit scores and card companies had to bear the loss.
It seems that many households have failed to learn the lessons of those years though card companies are stricter when looking at providing cards and credit limits. The figures suggest they could be stricter though they are happy to keep customers who can handle their minimum payment terms and conditions because that is how they make their money.
Even those people with top credit scores pay high interest. One of the factors that help an individual’s credit score is their debt as a proportion of their total available credit so no one is ‘condemned’ for having credit card debt. Referring back to that average of over $15,000 that will incur an APR of almost 17% on average, which translates into $2,600 in annual interest. What a waste in anyone’s terms!
If you look at your own debts and have a mortgage, student loan, auto loan and credit card debt you may be tempted to try to pay extra on your mortgage or student loan. You should look instead at clearing that card debt and resolving never to build up a balance ever again; merely use your card for convenience and pay the statement balance in full at the end of each month.
How can you clear that card debt?
- Balance transfer deals still exist but you have to remember they are introductory offers and at the end of a specified period the normal interest rate will apply. If you do not factor this in you are simply delaying inevitable problems. If you have a good credit score you will be attractive to credit card companies so you should do some research and find out the best deal around. However you must compare like with like.
- A consolidation loan is certainly something to consider. Personal loans will be considerably cheaper in terms of the interest charged than card companies charge. You will be able to see the monthly instalment commitment over a given specified term. If you negotiate a credit loan which can be paid in instalment over the internet and pay off your balance you are taking positive action. By all means keep your card because that will improve your ratio, debt against available credit, as you start to make your monthly payments.
- You may be able to reduce your balance by negotiating with your card company that may be amenable to helping you if it feels there is any danger of your defaulting. It certainly costs you nothing to ask.
Too many people appear to be in control of their finances yet the reality is that they aren’t. The outward picture of material success often hides the fact that they are struggling to pay their bills. Building up credit card debt is often a sign of someone living beyond their means and needing to go to the ATM to withdraw money to subsidize their lifestyle because they are spending too much. The problems will not go away without facing up to the situation and taking action. It begins with a budget which lists all pieces of income and expenditure to identify where the problems lie and where savings can be made.
There are always things you can look at:
- Are you wasting your money by paying too much interest?
- Is there a cheaper utility company out there?
- Is your insurance company and telephone network provider competitive?
- Are there small daily savings you can make, avoiding things like the coffee shop that over a month will add up?
These are just a few ideas and there are more. The main point is to get you to start thinking about financial management and how it can improve your life and help you sleep more soundly at night. You’ll be pleased you did.