Do fewer filings mean the average American family has finally recovered?
72,467 consumers filed for bankruptcy in August, and while that may sound like a large number, in reality it’s a 15 percent decrease from the number of filings made in the same month last year. At the same time, the quarterly debt report from the New York Federal Reserve showed loan and credit delinquency rates have decreased over the course of 2014 from 6.6 percent in the first quarter to 6.2 percent by the end of the second quarter in August.
Does this mean that the average American family is out of the woods when it comes to debt?
“These kinds of positive numbers can make it seem like it’s all smooth sailing from here – that we’re out of the recession and we don’t have to worry,” says Gary Herman, President of Consolidated Credit, “but in fact we saw a record number of enrollments in debt management programs in July.”
So perhaps Americans aren’t in the clear as much as they’re just getting better at finding solutions to avoid a worst case scenario when it comes to debt. After all, statistics show consumer borrowing is getting back to pre-recession levels. Even total credit card debt has recently jumped to a six-year high.
“Getting back to pre-recession borrowing levels is fine as long as you’re not repeating the same mistakes that caused us so many problems,” Herman continues. “As long as you have a strong financial outlook and savings in place, and the means to pay back that much debt, then there’s nothing wrong with going back to credit. It’s only when you borrow above your means that you run into trouble.”
5 tips to keep from repeating a bad credit history
Consolidated Credit offers these tips to help you avoid repeating the mistakes of the pre-recession era.
- Know your debt-to-income ratio. The amount of debt you have should always be in balance with your income level. If you don’t know your ratio, calculate it, and make sure to check it often to see if you’re getting in over your head.
- Don’t max out your credit cards. This is bad for your credit score because your credit utilization ratio will be too high, which is one of the two main determining factors in your credit score calculation. It also may mean you have more debt than you can pay back in a reasonable period of time.
- Don’t take on debt to pay off debt. Getting on a cycle of paying off one credit card with another or taking out payday loans to pay bills is only making a bad financial situation worse. If you’re struggling, find a solution.
- Never be satisfied just making minimum payments. If you have the means to pay more than the minimum amounts requested on your credit card bills, then you should. Create a payoff plan that works for your budget.
- Be wary of high-risk loans when you can’t qualify for traditional loans. When lenders wanted to help consumers who couldn’t qualify for traditional mortgages, they created high-risk adjustable rate mortgages (ARMs) that left millions in a bind when the economy took a turn. This doesn’t mean all new lending tools are bad, but if you can’t qualify for something using traditional means, it may mean you should reevaluate your situation before you borrow.