Debt is a universal problem. Luckily, it’s not an insurmountable problem. There are ways that you can manage your overall debt levels and still come out on top. The first hurdle when it comes to debt management, is understanding what debts you have, and how best to curtail those debts. Typically, household debt is comprised of the following: credit card debt, automobile loans, mortgage loans, personal credit loans, student loans and the like. The average US household debt is comprised of the following components:
- Student Loans – $46,597
- Mortgage Loans – $173,995
- Credit Card Debt – $15,654
- Automobile Loans – $27,669
The most worrying aspect of overall household debt is credit card debt. USA Today published a January 13, 2018 editorial where it was stated that household credit card debt topped out at $1.02 trillion according to the Federal Reserve Bank. This does not bode well for US households trying to pay off debt, especially in an era where interest rates are steadily rising. Recall that the interest-related payments on outstanding debt spike sharply with higher interest rates. Currently, the interest rate in the US is 1.25% – 1.50%.
Why Interest Rates Matter So Much
The Fed is working hard to strike a balance between economic growth, employment levels, and an appropriate inflation level. The Fed FOMC has been targeting 2% inflation, and now that we are nearing that growth target, monetary tightening is going to accelerate. Unfortunately, this does not bode well for households with high debt levels. Note that credit cards are associated with variable interest rates, meaning that as the federal funds rate increases, the interest repayments on credit cards increases accordingly.
A new study concluded that an estimated 31 million Americans with outstanding credit card debt believe that they will die with debt owing. In November 2017, the Fed reported that there was a 13% spike in revolving credit card debt to $1.02 trillion, a critical resistance level that has now been breached. Rising credit card debt is reflective of increased consumer confidence, but it also does not portray an accurate representation of gross domestic product (GDP) growth. When goods and services are purchased on credit, the economy is expanding in the wrong direction. The term consumption hubris has been bandied about by the WFC chief economist, John Sylvia.
Statistics reflect growing concern about credit card debt come from a YouGov survey which indicates that some 33% of US credit cardholders have no idea when they will be debt free, and 35% of them do not believe they will ever escape debt. This feeling of hopelessness that is so pervasive with people currently experiencing high levels of credit card debt is all too common. However, there are workable solutions to reduce the debt burden, ultimately eliminating it, and living a debt-free existence. The top 5 ways to start cutting down on burdensome levels of debt include the following:
- Own the Debt – Understand exactly what is owed, and take responsibility for it. Credit card debt, personal loans, mortgages, automobile loans, and student loans comprise the majority of overall household debt. Once you acknowledge each debt component, you can start putting a plan together to understand how to repay it.
- Set up a Budget – A Budget is a workable solution geared towards managing debt levels effectively. It’s about debits and credits – the money coming in and the money going out. Each component of spending needs to be logged, understood, and accounted for. By allocating a set spend to entertainment, education, housing, transportation, food, etc., it is possible to drive down expenditure and eventually gain control of debt.
- Tackle Your Debt Repayment Effectively – easier said than done right? Wrong! Debt repayment is possible by working intelligently. Credit card debt levels have high APRs (annual percentage rates), but there are ways to pay down credit card debts by applying for debt consolidation These loans are approved at lower interest rates than the applicable credit card rates, and you can repay them with money to spare. The savings generated through debt consolidation loans can go directly towards paying down the principal of credit card debt.
- Put Your Credit Cards on Ice – an extreme solution to a growing problem. Believe it or not, several credit card experts and debt management consultants believe that whenever credit card levels become untenable, you should simply stick your credit cards in a plastic bowl of water, into the freezer. The regular utility bills, telephone bills, and necessary monthly payments will still go through electronically – but you simply won’t have the physical card on your person to make payments. Once you have brought down the debt levels, thaw out your card, or request a new one and manage it wisely.