Research of the Week: Are You Living in a State of Debt?
New map identifies the most and least indebted borrowers by state.
The interesting study
Creditcards.com released a new interactive map that shows debt burdens by state. It includes months to pay off and interest charges, along with stats like average balance and the 90-day delinquency rate. More importantly, the study compares average credit card balance to the median income in each state. The results are telling.
The big result
The average American has too much credit card debt, regardless of where they live. Residents in states like Wisconsin, Iowa and North Dakota have some of the lowest burdens with balances below $5,000. However, when compared to median income levels, it’s still too much debt.
The fascinating details
Your credit card debt ratio measures the amount of credit card debt you have relative to your income level. The CreditCards.com study says cardholders should use no more than 15% of their monthly earnings to pay off debt. However, experts from Consolidated Credit say this is actually high for most families.
“For most households, credit card payments should take up no more than 10 percent of net monthly income,” explains Gary Herman, President of Consolidated Credit. “That provides enough breathing room for families to avoid credit dependence. Otherwise, you may have more money to eliminate debt, but you may be in a situation where you have to make new charges to cover other needs.”
So let’s look at the state that CreditCards.com says has the lowest debt burden – North Dakota.
- Credit card users have an average balance of $4,599
- Their median earnings are $34,336 per year, or $2,861 per month
- com says the average family would have $429 to use for credit card debt repayment
- However, if you calculate it at 10% instead of 15% then the total amount available for repayment is only $286
- If you have a $4,599 at an average interest rate of 18% APR, it will take 19 months to pay off your debt; you will pay $703.79 in total interest charges.
- So the time to payoff is 7 month longer with a truly balanced budget
What you can do
In two words: Debt consolidation
According to another recent study from NerdWallet, households are reaching “unsustainable” debt levels. Essentially, this means most households can afford to repay their debt efficiently using traditional means. As a result, you can make payments month after month, but never really make headway to eliminate your debt.
Debt consolidation allows you to restructure debt payments so you can pay back what you owe in a more efficient way. You reduce the interest rate applied to your debt to minimize total interest charges. As a result, more of each payment you make goes to eliminate the actual debt instead of accrued interest charges. You can get out of debt faster even though you may pay less each month.
If you have a good credit score and a reasonable amount of debt to repay (usually less than $5,000), then look into do-it-yourself debt consolidation. If you have less than perfect credit or more debt, you may need help. In this case, contact a credit counseling agency to see if you qualify for a debt management program.