The State of American Debt
Debt is not an uncommon thing. Practically every household in the United States owes some kind of debt, whether it’s on credit cards, car finance deals or mortgages. Some form of debt consolidation is becoming a more common practice throughout many households.
In fact, the NerdWallet 2015 American Household Credit Card Debt Study looked at credit card, mortgage, auto loan and student loan debts in the average American household, and showed that debt is fairly commonplace among average American workers. The statistics show that the average US household with credit card debt owes $15,762 overall.
The study also found that households with mortgage debt owed on average $168,614, and $27,141 in auto loan debt.
These numbers offer a glimpse into the average spending of American households, but it’s important to note that they refer to an entire household and not an individual. This could mean that credit card debt is split among a number of individuals, and auto loan debt could be spread across two or three vehicles, sometimes recreational vehicles.
The findings also show us that the average US household owes, overall, $130,922, making it clear that debt is a substantial part of the American economy and not something to be ashamed of. In fact, the average household debt adds up to a massive $12.12 trillion, according to the same NerdWallet report.
A particularly interesting figure discovered by NerdWallet, is the amount of interest being paid by the average household, too. As of Q4 2015, the average household is paying $6,658 in interest on finance and credit deals, which equates to almost 13% of the average household income of $51,989 *(according to 2013 U.S. Census Bureau statistics).
The first thing you must understand is that you’re not alone. All too many people find their selves overwhelmed with debt, even to the point of being addicted to credit cards. There are some great options available to you, but overall – it starts with YOU.
Let’s take a look at the impact that debt has on the household and the economy, the role it plays in your finances and a few options on how to pay off debt and help you get back on track.
Good Debt or Bad Debt?
It’s wrong to assume that all debt is bad debt. This also takes into consideration your age group. For those 20-50, your mortgage is a prime example of this. It is only with this debt that millions of Americans are able to spend hundreds of thousands of dollars on their home. And, this debt is considered good for a number of reasons, primarily because it improves your credit rating and provides you with an asset that can increase in value as time passes.
Remember also that it’s essential for you to have a mix of credit and debt in order to have a positive credit rating. Around 10% of your FICO score depends entirely on a credit mix, taking into account credit cards, installment loans, auto loans, finance company accounts, retail credit accounts and mortgage loans. While you don’t need to have one of each, it’s important to have a variety to boost your score past 700.
Without a mix of credit, you will find that interest rates on loans and auto finance deals become significantly higher. Yeah, it doesn’t seem fair, but that’s the ways it is.
Outside of mortgages and mixed finance, credit card debt is typically considered bad. While you may be able to get a 0% interest rate as an introductory deal on your credit card, that won’t last long – and, in most cases, credit card interest is quite extortionate.
When examining your debts, and deciding whether you need to consider a debt consolidation program, it’s essential to look at the mixture of good and bad debt, as well as your ability to pay it back, interest included. Your debt management abilities will be considered before entering into any kind of debt consolidation program, allowing debt experts to decide whether you are capable to pay back what you owe without any amendments to original agreements.
Before we discuss debt consolidation companies, let’s take a look at some of the best ways to avoid debt in the first place, or after you’ve paid off what you owe.
The United States currently has a total consumer debt of almost $3.4 trillion, according to 2015 statistics. This is an extraordinarily large amount, and it has been fueled not just by rising living costs, but also an increase in the amount of young people using credit cards for small payments.
In 2006, $51 billion worth of fast food was charged to credit cards, a $20 billion increase from the year before. This trend has continued over the last ten years.
Not only that, but a Gallup survey has recently shown that the average number of credit cards owned by individual Americans is 2.6 – however, when the survey discounted those without cards, the number rose to 3.7, which should show the severity of this issue.
There are lots of ways to not only control your debt, but stop from accruing any more. Most of the time, getting overwhelmed with debt is a matter of bad money habits, as we live in a fast paced, “want it now” society. There is always hope if you’re able to focus and remain disciplined, and these are some of the best ways you can avoid increasing any credit card debt you might already have. Keep in mind, with consolidation the debt is still there, along with the habits that caused the debt. Most of the time, true debt help is not quick or easy, but takes budgeting, discipline, and learning how to live on “less” than you make.
- Prepare an emergency fund
This is a common tactic that allows you to pay for unavoidable and surprise disasters. Whether it’s an emergency dental bill or a broken washing machine, an emergency fund in a separate savings account can be used in place of a credit card. This allows you to pay off the bill without adding interest.
- Be careful with credit card balance transfers
Those tied up with credit card debt may find themselves transferring their balance from one card to another. This might alleviate some concerns in the short term, but it ultimately solves nothing.
If you’re considering transferring your balance, ask yourself why you’re doing it. If it’s to prolong the settlement of a debt, stop yourself. If, however, you’re attempting to take advantage of a lower interest rate on another card, go right ahead!
Consider a balance transfer a tool for avoiding long-term payments, as opposed to a method of prolonging payments.
- Always pay your monthly balance
Credit cards are ideal for making payments that you can’t immediately afford, but the only way to avoid accruing debt is by paying off your balance every month. Stick to making payments with one credit card, and only purchasing things within a price range that you can afford.
It’s easy to fall into the trap of paying off the minimum monthly payment, but as the years go by, you could see yourself paying thousands extra in interest, and in some cases – NEVER getting it paid off. Unfortunately, statistics prove many pay only the minimum or a bit over.
So, What Exactly is Debt Consolidation?
Debt consolidation is a third party payment system that aims to merge your debts into one, allowing you to make a single monthly payment with a lower overall interest rate. Using a debt relief plan like this sometimes eases both financial and mental pressure, meaning you won’t be juggling payments on multiple dates every month. And, with the reduced interest rate agreed upon with all your creditors, thanks to the debt management company you work with, more of the money you pay will go towards the balance as opposed to the interest and other financial costs involved. The only bad thing is the term is usually extended, meaning you’ll pay quite a bit more interest for the duration. However, sometimes basic mathematics say that debt consolidation ‘can be’ a good idea in some situations. You can’t affect a money makeover if you are unable to make payments to your creditors in the short term, and a person making payments needs a lower interest rate to pay principle faster. As the saying goes “You can’t borrow yourself out of debt”, but that’s absolutely no excuse to let yourself drown either.
When you’re looking for the best debt consolidation program, remember that creditors don’t show favor to any one company. In fact, every single one of these companies will have to jump through the same hoops and meet all the same legal requirements. The major difference between them all will be the quality of service they provide and the experience they have in the industry.
There are important questions to consider before applying to one of these type programs. After all, it’s your future at stake. Always find out:
- What options will the company provide you with their program? How will it affect your credit? How long is the program? What if a creditor takes legal action against you during the process?
- Does the company charge a fee to review your finances and identify financial solutions? What are the details you can anticipate with your debt consolidation program? Are there any third part fees or hidden costs?
- Does the company have a long history of successfully helping clients with their financial needs? Is this a company you can trust with debt consolidation? Are they rated with the BBB? Have you researched their testimonials?
According to Top Consumer Reviews the top 3 best rated debt consolidation companies are:
Moving on, we’ll examine debt counseling as another alternative.
A Look at Debt Counseling
Before you are able to go down the route of debt relief through consolidation, you should attempt a debt counseling session. A specialist debt counselor is not there to interrogate or accuse, but instead to help you come up with manageable solutions to your debt problem.
You can seek help from a counselor through a dedicated debt consolidation company, but the US Bureau of Labor Statistics shows that counselors are now available throughout the scientific and technical industries, colleges, universities and professional schools, and throughout the legal industry.
A counselor will take a look at the basic expenses of living, as well as the amount your creditors are expecting you to pay out every month. Should they find that you have enough money left over after subtracting these debts, a consolidation program may be advised. In other situations, a debt counselor will work with you and your creditors to arrange more affordable deals that may allow you to manage these costs over a longer period of time.
The main thing you should take from a debt counseling session is that there are people there willing to help you, and though debt might seem menacing, it can be solved.
26% of Americans admit to not paying their bills on time, according to the 2014 Consumer Financial Literacy Survey of Adults, but there simply isn’t any need for this to happen. Start with debt counseling and you’ll soon be on the way to achieving more manageable monthly expenses.
What About Debt Consolidation Loans?
Debt consolidation loans are about more than just reducing your costs in the long run. As well as creating an affordable monthly payment with a reduced interest rate, a debt relief deal can significantly change the quality of your life in the following ways:
- 1. No more collection calls
Around 77 million Americans currently have at least one debt in collections, according to an Urban Institute Study, which means the debt is either unpaid or in dispute. Debt collection agencies have your debt turned over to them, and as a result they will pay regular visits to your home, send letters and make phone calls until you pay what you owe. This can be particularly traumatizing for people who simply do not have the means to pay.
A consolidation loan takes away the collection agencies and calls, and helps you avoid getting into this position again.
- Improve your credit score
Through a disciplined debt management plan, allowing you to pay off what you owe in smaller, more manageable monthly payments, you can gradually improve your score.
Keep in mind, without a solid and workable debt guidance plan at your side, you will repeatedly miss payments you agreed to make and continually damage a credit score that took years to establish in the first place. Stay on top of your payments, and you can watch your credit score grow again.
- Finding a consolidation loan
The amount that you owe will also play a part in your eligibility for a consolidation loan, but with the abundance of lenders out there, the competition will most likely land you a firm that can help. This is a huge industry, with Americans owing a massive $733 billion in credit card debt overall, meaning that debt consolidation companies are busier than ever. You’ll find that debt counselors at these places are more than happy to spend as much time with you as you need, and walk you through every step to obtain the right loan for your needs. Many are using places like Lending Club, Avant, or Lending Tree.
Commit to Taking Control and Eliminate Your Debt!
If like millions of other Americans, you have debt trouble, you have a few options ahead of you to carefully consider. Don’t fall for the scams of debt forgiveness that seem too good to be true, most are. Getting help is actually easier than you’d expect, and allows you to satisfy your creditors with a simpler and manageable monthly plan. Don’t let it overwhelm you, that can actually affect your overall health and relationships. Help is there, even if you need expert guidance. I think most Americans have at least once in their life, gotten themselves over extended with debt. The way you get out of debt is by changing your habits. You really need to commit to a written game plan and sticking to it. Life will be sweeter when you do. Some people actually have children with “business or entrepreneur” minds, and believe it or not, they might have suggestions also!
Start your journey today, and take back control – you can do it!