The average American family is carrying a lot of debt, with balances continuing to rise. It may be tempting to blame consumer debt, such as credit cards and loans, on reckless spending, but it’s important to understand the reasons behind debt accrual.
In a recent study, the personal finance website NerdWallet looked at the current status of consumer debt in the U.S., making the case that consumers have valid reasons for taking on debt and suggesting the situation can improve.
What debt means to households
The level of household debt in the U.S. has risen steeply in the last few years. According to the NerdWallet report, “2019 American Household Credit Card Debt Study,” credit card debt (estimated to be $443.96 billion in September 2019) has increased more than 34% since 2014.
Consumers are footing a big bill for racking up debt, with revolving credit card debt (meaning the balance that carries over into the next month) costing American households an average of $1,162 in interest every year.
Why consumers are going into debt
The report notes that although household income is outpacing most costs, there’s one spending category that’s growing at an even faster rate, and that’s medical costs. They have risen almost 33% since 2009, and while that’s only three percentage points higher than the rise in income, increasing medical expenses are likely to hit vulnerable consumers especially hard.
For those consumers with insurance requiring high deductibles, or those who have no insurance at all, that rise in costs will no doubt have a financial impact.
Another point raised by the survey is the cost of parenthood, with 37% of respondents admitting they delayed or are delaying having their first child for that very reason.
If you look at the required unpaid parental leave alone, which NerdWallet calculates as costing an average of $8,516 before tax, it’s no wonder that first-time parents may find themselves relying on credit cards to survive. Then add the cost of medical bills, childcare, clothing, diapers, and everything else new parents are faced with during pregnancy and after their child is born, and you can see why 80% of parents with children under 18 surveyed said they have credit card debt, compared to just 58% of people who don’t have under-18s.
Income outpaces cost of living
It’s not all bad news, though. NerdWallet reports that incomes have outpaced the cost of living over the last decade, with the cost of living growing by 19% since 2009, compared to a growth of 30% in median household income.
While that’s certainly a positive statistic in terms of the financial stability of the average U.S. household, shouldn’t that mean we would be seeing a decrease in consumer debt?
After all, as the gap between the cost of living and income widens, that extra money could be going towards paying expenses and clearing debt.
But of course, it’s not that simple. Without understanding what strategies they can use to pay off debt and tackle poor spending habits, American households are likely to struggle. But with the right knowledge and support, consumers can be optimistic about their financial futures.
So, what can you do to overcome debt? Here are some suggestions:
Strategies to overcome debt
Create a budget
Working from a budget every month is incredibly helpful for combatting debt. Budgeting gives you greater visibility of where your money goes and helps you avoid missing payments.
Take advantage of technology
With so many of us relying on our smartphones to help organize a variety of different areas of our lives, it makes sense to turn to them for help with budgeting, too.
Check out these popular (and free!) apps that can turn your smartphone into your strongest financial ally.
Looking for something a bit lower-tech? Don’t worry, there are budgeting techniques, such as the envelope method, that don’t require technology at all.
Minimize interest costs
According to the Federal Reserve Bank of St. Louis, the average interest rate on credit card accounts was 16.97% as of August 2019, making credit card debt one of the most expensive types of consumer debt.
NerdWallet suggests that consumers with existing credit card debt make minimizing interest costs their priority.
Here are a few ways to do this:
- Transfer a balance to a 0% interest card (if your credit score allows)
- Make more than the minimum payment each month, and
- Pay off credit cards in order of their interest rates (i.e., focus on paying balances with the highest interest first)
Make extra payments when possible
As not everyone has a credit score robust enough to consolidate their debt to an interest-free credit card, another suggestion is to make extra payments throughout the month.
Interest is calculated on the average daily balance rather than on a set date, so making extra payments will reduce the average daily balance and, therefore, the interest assessed on it.
Experts agree that there’s good debt and bad debt, and understanding that is a crucial part of maintaining good financial health.
NerdWallet’s study demonstrates that, while consumers have been using debt as a way to ride out tough economic times, the fact that income is outpacing the cost of living is a positive sign for the future.
By taking steps to minimize bad debt and being savvy in terms of good debt, consumers might not need to use debt as a survival tool.