The National Institutes of Health have identified debt as a leading cause of marital and familial discord, and drug and alcohol abuse in this country. Debt can bring on sleepless nights, damage personal relationships and erode work performance.
Yet Americans continue to pile up staggering credit card debt.
SMR Research Corp., a Hackettstown, N.J., research firm, recently pegged average credit card debt to the four largest and best-known credit card companies at $5,285 per American household.
The Board of Governors of the Federal Reserve System in Washington, D.C., has released figures showing revolving consumer credit, including credit cards, check-accessed revolving lines and checking account overdraft balances, has now reached more than $700 billion.
And last month , the American Bankers Association said late credit card payments shot up in the second quarter of this year, with the percentage of accounts 30 or more days past due rising to 3.93 percent, up from 2.99 percent in the first three months of the year. The delinquency rate was the highest since the ABA began tracking it in 1980.
Several factors contribute to soaring rates of credit card debt. Chief among them is the ready availability of credit. According to Tiff Worley, president of Roseville, Minn.-based Auriton Solutions, a non-profit organization that helps clients overcome financial crises and has offices in Evanston and Bloomingdale, Ill., an average of 20 to 25 credit solicitations are sent to every man, woman and child in the country each year.
Adding to the problem are the incentives many credit cards offer, which spur some to buy more and more with plastic in an effort to accumulate frequent flier miles or gain cash-back rewards. Yet another factor is that large-ticket items that once weren’t chargeable now are.
“You can now pay your income taxes, and at many colleges and universities you can pay tuition on a credit card,” said Kathy McNally, vice president for national financial literacy with the Silver Spring, Md.-based National Foundation for Credit Counseling (NFCC).
“So it’s the combination of buying every little thing, as well as some very big things, that contributes to this problem. It’s an instant gratification nation.”
Just as warning signs can tip off health concerns, a number of red flags signal mounting problems with credit card debt, said Catherine Williams, president of Consumer Credit Counseling Service of Greater Chicago, an affiliated member of NFCC.
One sign is rapid depletion of savings, or no savings at all, while others include borrowing money to pay off debts and not really knowing what your credit card debt is. Another warning sign is using more than 20 percent of your take-home pay to pay off credit card debt, Williams said.
Among the most serious warning signs is moving unsecured debt into secured debt. “In other words, moving debts on five different cards into your most prized possession: your home,” Williams said. “You’re using the equity, the increase in value in your home, to pay for your old tennis shoes and long-since burned up tanks of gas.”
At the heart of this madness, most agree, is a fundamental shift in the way Americans think about savings and debt. “We’ve forgotten the cornerstone, the old-fashioned passbook savings account, and putting money away for those unforseen expenses,” Williams observed.
The first step to getting out debt, Williams said, is gathering everyone in the household who spends money and reaching a consensus that expenses need to be slashed. Next, all credit cards should be put away, with the responsible adults in the household carrying one card each for true emergencies. The next step is to prepare a realistic household budget, and stick to it.
For instance, instead of regularly dining out or ordering carry-out food, resolve to go out to dinner only on payday, Williams suggested.
Many people prefer to keep a diary of the amounts and nature of all their expenditures, both cash and credit, for several weeks, said Joel Greenberg, a trustee of the Fairfax, Va.-based Association of Independent Consumer Credit Counseling Agencies.
“I’ve had people tell me after a month or two that they realize they’ve been spending much more money than they thought they were,” he said. “Once they see that detail, they can easily recognize where they’re spending more than they should. That will enable them to achieve a balanced budget.”
Getting expenditures under control is one thing, but it’s quite another to pay off the existing debt. One recommended way to do so is called laddering. Rank your cards from highest to lowest interest, then resolve to pay off the card with the highest interest rate first.
Before starting the laddering process, though, be sure to read the fine print on your credit card agreements, McNally said. “People forget that this is essentially a contract,” she noted.
“Some of them have a rate that’s going to jump. Some of the solicitations are for very low interest rates, but [those rates] only last for a very short time. Read the fine print to make sure your approach is strategic, to make sure you do pay off the highest interest cards first.”
Because of the way interest is compounded, you can pay off debt faster by making smaller payments more often. For instance, rather than making one $100 payment at the end of the month, divide that sum in two and pay $50 approximately every 14 days.
However, for some with very high credit card debt, laddering won’t be enough, Worley said. Many of the clients his company helps are facing one of two problems: They can’t afford their minimum monthly payment or they realize their debt is so large that making that payment will almost never get them out of debt.
In these cases, Auriton Solutions and other reputable credit counseling organizations work with clients to determine monthly payments they can afford, a process that customarily requires the counseling agencies to gain concessions from the credit card companies involved.
Once free of credit card debt, resolve to not let yourself be sucked back into the black hole of living on plastic. McNally encourages clients to use a debit card instead of a credit card.
“It’s tied to the amount of money in a person’s checking account,” she said. “So it precludes that pattern of overspending, but it has convenience, it’s safe and enables very good recordkeeping.”
It takes discipline and, in some cases, years of careful budgeting to pay off extensive credit card debt. But doing so can lift an enormous weight from debtors’ shoulders.
“The advantages are greater than most people even realize,” Greenberg said. “There’s certainly the advantage of an improved credit report. That means when they’re borrowing in the future, the cost of their loans will go down. In addition, many insurance companies have used an individual’s credit history in determining whether they are high risk. And in certain industries, employers look at credit history to see if an individual has financial pressure on them. It could be the difference between offering them a job or not.”
For more information, contact: Auriton Solutions, 888-562-4557 or www.auriton.org; National Foundation for Credit Counseling, 800-388-2227 or www.nfcc.org; Consumer Credit Counseling Service of Greater Chicago, 312-849-2227 or www.debtsolver.org; or Association of Independent Consumer Credit Counseling Agencies, www.aiccca.org
