| December 30, 2016

Research of the Week: Average Credit Card Debt at $16K

Consumers increasingly turning to credit cards to cover budget gaps.

Each week, Consolidated Credit searches for financial research that can help you deal with your debt and budget. This week…

The interesting study

A new report from NerdWallet featured on CNBC explores annual consumer debt levels in the U.S. from 2002 to 2016. The report reviews data from the Federal Reserve Bank of New York and the Census Bureau. The results are telling.

The big result

The average American household has a total credit card balance of $16,061. That’s just shy of the record high reached in 2008 just prior to the recession.

The fascinating details

Average credit card debt piles on

Total household debt is now 1½ times what it was in 2002. Including mortgages, households carry $132,529 in debt. That’s a significant increase from 2002 when average debt leveled out at $88,063.

NerdWallet argues that the root cause of the increase stems from the gap between cost of living and wages. Income has only grown by 28% in the past 13 years, while cost of living increased by 30%.

They also say the problems aren’t helped by credit cards themselves, which now carry an average interest rate of 18.76%. Households pay an average of $1,292 in credit card interest charges per year.

Paired with increasing auto, student loans and medical debt, you have a perfect storm of over-borrowing in many households. In fact, medical debt expenses have risen by 57% since 2003.

Interestingly enough, although credit card debt levels are high, it’s not the biggest source of borrowing trouble for most Americans. In 2007 just before the Great Recession, credit card debt made up a much larger percentage of total indebtedness. Now, credit cards are vastly outweighed by mortgages and student loans.

“Next year, Americans need to stop spending and prioritize debt repayment,” says Gary Herman, President of Consolidated Credit. “We learned a hard lesson in 2008 about how the burden that’s created when households borrow too much. If American families don’t tighten their belts, we could be facing a repeat of challenges faced during the Great Recession. And that’s regardless of what happens to the economy in the coming years.”

What you can do

If debt repayment needs to be a priority for you next year, here is a handy quickstart guide to help you take action:

  1. First assess your personal debt to income ratio to see where you stand – a ratio of 36 percent or less signifies you’re financially stable
    1. Also check your credit card debt ratio, by comparing your total monthly payments to your monthly income; this ratio should be 10 percent or less
  2. Review your budget to free up as much cash as possible for debt elimination, then decide on the best way to reduce your credit card debt:
    1. First consider a debt reduction strategy that you can do on your own
    2. If you can’t develop a plan that eliminates all of your debts within the next 3-5 years, consider options for debt consolidation
    3. If you have bad credit and can’t consolidate on your own, contact a credit counseling agency to see if you’re eligible for a debt management program.
  3. Once you have a plan to eliminate your credit card debt, work on any student loan debt you have next:
    1. Consolidate federal student loans with a Federal Direct Consolidation Loan
    2. Then, if you’re struggling to make the payments, use an income-based Federal Repayment Plan to reduce your payments so they work for your budget.
    3. For private student loans, you can consolidate them together with a private student debt consolidation loan. Just make sure to only consolidate your private loans this way – if you use this for federal loans, they become ineligible for federal programs.
  4. Now that you have the two most common “problem children” of your consumer debt under control, reevaluate your debt-to-income ratio to see where you stand.
    1. If need be, refinance your auto loan to reduce the term so it can be paid off faster. The faster you eliminate the debt, the more money you save on interest charges.
    2. Also, if you haven’t done so already, look into refinancing and loan modification programs offered under HAMP and HARP from the federal government.

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