The Cost of High Debt

Written by Chris S in Your Debt

The Cost of High Debt

Let’s face it, America and Americans are in serious debt. We live on credit. The country lives on credit. We live on the money we don’t have.

Drive-by a fancy house with a fancy car parked in the driveway way and chances are the owner doesn’t own them.  They are owned by banks and the owner is slowly paying off these debts. 

We take on debt to pay for things that depreciate in value like clothes, shoes, furniture, cars, etc.

How expensive is credit cards

Currently, the average U.S. credit card debt per household is a whopping $15,788.  The average APR on credit cards with a balance is 14.48%. The total U.S. revolving debt is $852.6 billion of which 98% is made up of credit card debt.  Total U.S. consumer debt is $2.42 trillion. U.S. credit card default rate is 13%. (Data as of 2010). 

Undergraduate college students are currently carrying record-high credit card balances (average $3,173). College students graduate with an average credit card debt of over $4,100 with almost $20,000 in total debt. Personal bankruptcy in the U.S. totaled 1,538,033 in 2010, up 14.4% from 2009.

Living with debt has become the American way. We have been programmed to live with debt. Many people graduate with huge loans, buy a car and home with a loan, and buy things they don’t need (most of the time) with credit cards and home equity loans. Many Americans, even with good-paying jobs, end up living paycheck to paycheck.

Many creditors report that people owe too much because they are irresponsible spenders, however, recent studies have shown that U.S. wages have been flat, while costs of basic housing, medical care, education, and food have increased. 

Debt and inflation

Not all U.S. consumers are in debt because they are not responsible; they are in debt because their income has not kept up with inflation. In a sense, the salary has been going down over the years. Because of this consumers haven’t reduced their expenses to match raising living costs and their stagnant income.

Unfortunately, many people don’t know they are in trouble before it’s too late because they don’t track their financial status and if they sense trouble, they just ignore it or don’t know what to do. It is vital that consumers track their financial status regularly so they don’t fall into a financial trap.

 

Debt Reduction vs. Savings

If you are contributing money to a savings account and/or retirement account, you need to stop ASAP and pay off your debt. You should use your money to cover living expenses and the remaining money to pay down your high-interest debts.

The reason is, that your savings and retirement account is earning much less in interest than the interest you are paying on your debt.  You must use every remaining dollar to pay down your debt. 

Of course, you must first pay off the highest interest debts first.

When your financial situation improves, you can then start to contribute to your savings and retirement accounts.

If you pay the minimum due on your credit card debts, it will take you months or years to pay off those debts and you will pay hundreds or thousands of dollars in interest. Other techniques you can use to get out of debt are:

Negotiate with your creditors. Creditors don’t want you to stop making payments. If you explain to them that you can no longer afford to pay, they may be willing to lower your monthly payments and/or interest rate.

Increase your income:  You may get a second or part-time job or start a side business. You may also try to gain work extra hours (overtime) at your job.  If your spouse doesn’t work, it may be a good idea for her/him to find a job.

Consolidate your debts:  Debt consolidation is borrowing money at a lower interest rate to pay off a higher-interest debt to ultimately pay off your debt faster and to save money.

Getting help:  There are many nonprofit credit counseling agencies that can help you to develop and maintain your budget. They may help you set up a debt management plan.

File for bankruptcy:  This should be your absolute last option. However, bankruptcy maybe you’re the best option if your monthly expense is extremely higher than your expenses that it will take decades living on a barebones budget to pay off your debt. 

You must consult with a bankruptcy attorney to determine if you should file for bankruptcy and which type you should file for (Chapter 13 reorganization which gives you 3-5 years to pay your debts or Chapter 7 liquation which eliminates most of your debts.

Secured and Unsecured Debt

Secured debts are debts that you have collateralized with an asset that you own.  The asset is referred to as collateral. When a debt is collateralized, a lien is put against your asset by the lender. 

The lender has the legal right to take the asset if you fall behind on your payments.  A good example of a secured debt is your mortgage and car loan. If you fall behind your payments, your house is foreclosed and your car repossessed.

Unsecured debts are debts that creditors do not have liens on your assets. Many credit cards are unsecured debts.  The creditor does not have liens on any of your assets. If you don’t pay an unsecured debt, the creditor will try to get you to pay by using a debt collector and placing the non-payment of debt on your credit report. 

The creditor must sue to get the court to try and collect the money you owe.  The creditor may ask the court to seize your assets, place a lien on an asset so you can’t borrow against it or sell it without paying off your debt first, or garnish your wages (if legal in your state).

Keep in mind that certain unsecured debts should be treated as a top priority because of the potential consequences of not paying.  There may be grave consequences (large fines or even jail time) if the following unsecured debt isn’t paid:

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