Americas credit card woes might be far worse than the media has led us to believe. While the financial headlines over the past few weeks have been dominated by stories of how credit applications are on the rise and consumer payment delinquency rates are dropping, these little feats dont give an accurate portrayal of the countrys economic climate according to a recent study by Consolidated Credit. After crunching all the numbers, the credit counseling service found that Americas credit card debt is actually approaching toxic levels and this time theres no easy way out.
Debt becomes toxic when too much of it is accumulated to comfortably pay back. Though the level of toxicity can vary depending on a particular debtors financial status, debt is generally considered to be toxic when the default rates on it approach double digits. Regarding Americas credit card debt, thats exactly whats happening.
According to the latest Federal Reserve study, total consumer debt including credit cards, mortgages and student loans rose by 9.3% overall to end the year at $2.498 trillion. That marks a 4.5% increase in credit card debt alone, which Consolidated Credit founder Howard Dvorkin sees as a sign that middle-class consumers are taking major risks to stay afloat. People made some progress in reducing card debt earlier in the year, he told the New York Post in an interview, but in the last few months, as the stock market started to rise, they started to return to their old ways of charging things.
The last time consumer card debt climbed this fast was right before the credit crunch of 2008. Back then, the toxic debt ended with millions of sub-prime borrowers defaulting on their mortgages, thereby unleashing a torrent of foreclosures on the housing market. Since the country is still weathering the worst of that collapse, the luxury of giving up your home to get out of debt is gone. Thanks to the bottomed-out home market value, Americans will need to find another way to stay out of their lenders pocket.
Now more than ever, Dvorkin says, families need to work at saving and paying off any outstanding debts. We agree with him. If youre struggling with credit card debt, it’s time to seriously rethink the way youre handling your finances, because things are only going to get worse from here. Should toxic credit card debt lead to another market collapse while youre still in the red, it could mean total ruin for you and your family.
If you want to start climbing back into the black, sit down with all of your bills and figure which one is costing you the most money in terms of the minimum payment and the interest. Once you have the most costly debt targeted, attack it savagely. Set aside enough money every payday to cover your total minimum payments as well as your food and housing expenses, and then use everything you have left to pay off the targeted debt. Once its gone, repeat the process with the second costliest debt. Its not going to be fun living dirt poor for such an extended period of time, but if you can stay committed, youll be out of debt in a couple of years. And thats a very, very good place to be.