Summary
For the first time in history, Americans' credit card debt has surpassed the concerning threshold of $1 trillion, as reported by the Federal Reserve Bank of New York. The second quarter of 2023 saw credit card balances swell by an alarming $45 billion, amounting to a 4.6% rise to reach $1.03 trillion. This surge, coupled with rising auto loan balances, has propelled the overall household debt by 1%, landing at $17.06 trillion for the quarter. Since the end of 2019, preceding the pandemic, there's been a jump of a whopping $2.9 trillion in household debt.
Drowning in debt? We’re here to help. Dive into our proven strategies to find your way out and stride confidently toward financial freedom.
Understanding Consumer Debt
Consumer debt, a term often misunderstood, refers to the debt individuals accrue for non-business or non-government-related purchases. It excludes medical and tax debts, as well as business loans and commercial properties.
Common Types of Consumer Debt:
- Credit cards
- Retail cards
- Payday loans
- Auto loans
- Student loan debt
- Mortgages and home loans
- Unsecured personal loans
Your 5-Step Strategy to Tackle Consumer Debt
Step 1: Assess Your Debt Landscape
Begin by assessing your debt. Gather all your loans and credit card statements. Write down the balance, interest rate, and minimum payment for each one. Also, work to order your bills according to both highest interest rate and outstanding balance.
Step 2: Negotiate for Better Rates
Contact your creditors and request a lower interest rate on your loans. Many creditors are willing to work with you, if you have had good payment history and explain some type of financial hardship. If they aren’t willing to consider this, you can always consider taking other steps. Refinancing your home or car payments with another lender or transferring your credit card balance to a new credit card with a lower interest rate can help. Obtaining lower interest rates will almost always lower your payments unless you are also shortening the terms of your loan.
Step 3: Carve Out a Robust Budget
Evaluate your personal budget to determine how much money you can afford to allocate towards your monthly debt payoff plan. Compare your net income against your monthly expenses (e.g., housing, utilities, loan payments, food, and clothing). Any funds you have leftover can be used to reduce your debt and save.
Step 4: Choose Your Debt Repayment Method:
Once you truly understand exactly what your total debt amounts to, it’s time to start paying it down. When it comes to repayment plans, there are many options. The one you choose will likely depend on your current income, how much debt you have occurred, and other financial obligations. Let’s start by comparing some of the most common options.
Debt Avalanche: Tackle the highest interest debt first and move downwards.
Debt Snowball: Begin with the smallest loan amount, eventually addressing the larger sums.
Debt Consolidation: Combine multiple loans into one, possibly at a reduced interest rate.
Consumer Credit Counseling: An external agency assists you with debt management, often leading to lowered rates.
Bankruptcy: As a last resort, Chapter 7 or Chapter 13 bankruptcy can be considered.
Step 5: Stay the Course
Regardless of how you choose to get out of debt, the most important thing is that you stick to it. Since paying everything back at once is not possible for most, getting out of debt requires patience as you chip away at it. Each payment is helping you get closer to paying off your debts, so don't get discouraged as you go. Debt repayment is a marathon, not a sprint, so keep going!
The Upsides of a Debt-Free Life
While paying off debt can involve making some big changes, there’s so much to gain from having more money at your fingertips. Having to pay less means:
- Higher disposable income
- Amplified saving potential
- Opportunities to invest in the future
- Better credit score
- Chance to give back through charitable donations
As you embark on your journey toward fiscal freedom, how do you envision leveraging your financial liberty?
Taking The Next Step
At First Service, our team of experienced financial professionals is committed to your success. Our mission is to provide financial products and services that enhance our members’ lives and educate others on how to enhance their relationship with their financials. If you’re serious about improving your financial situation, we are here to help.