Tag Archives: Credit Card Debt

Americans in Debt

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“U.S. adults carrying debt hold an average of $23,325, exclusive of mortgages

Most Americans carry some form of personal debt. In fact, 77 percent of Americans have debt, according to the 2018 Northwestern Mutual Planning and Progress study.  And, if you have significant levels of debt, you need a financial plan to manage your debt and get out of it. That’s because debt can cost you money, potentially a lot of money for a long period of time.

In fact, if you take the time to tally how much you’re paying in interest over the life of your debt, it might just be the motivation you need to finally make a big push to pay off your debt so you can spend that money on something you enjoy or can invest in your long term financial freedom.

The Northwestern Mutual’s 2021 Planning & Progress Study showed that among U.S. adults aged 18+ who carry debt, they hold an average of $23,325 excluding mortgages. This represents a downward trend of over 20% since 2019.

While overall debt is on the decline, 30% of Americans’ monthly income on average goes towards paying off debt other than home mortgages.

Far and away, the top source of debt after mortgages is credit cards, accounting for more than double any other source, according to the study:

  • Credit card bills – 19%
  • Car loan – 8%
  • Education loans – 7%
  • Home equity/lines of credit – 4%

Debt under control, or controlled by debt?

“78% of Americans say debt has impacted their ability to achieve financial security.”  Northwestern Mutual’s 2021 Planning & Progress Study

When prioritizing debt versus savings, the interest rate on your debt is a key consideration. The higher the rate, the more you stand to save by paying off the debt.

But also consider the type of debt. A debt can be “secured” or “unsecured”. A secured debt is backed by an asset, also called collateral. Auto loans and mortgages fall into this category: Both allow the lender to repossess the asset if you stop paying the loan. In other words, they can take what you bought with the loan and sell it to get their money back.

With debt consuming nearly a third of monthly budgets on average, many people also say that it has negatively impacted their ability to pursue other financial milestones. Because of Americans personal debt:

  • 29% delayed making significant purchases
  • 18% delayed saving for retirement
  • 14% delayed buying a home
  • 8% delayed having children
  • 7% delayed marriage

Having to pay down debt also carries weight in the way people feel about their long-term financial stability – 78% say that debt has impacted their ability to achieve long-term financial security.

“The latest numbers show steps in the right direction compared to previous years, but we continue to see debt hindering many Americans from having the financial freedom to make other important decisions in their lives,” said Christian Mitchell, executive vice president & chief customer officer at Northwestern Mutual. “Having a plan of action to manage debt and stay on top of payments is critical to achieving future financial goals.”

Although debt is holding some back from major decisions, there are positive indications that people are looking ahead to manage and reduce their debt. Two-thirds (66%) of those with some debt say they have a specific plan to pay it off, and have a timeline for doing so:

  • 45% only expect to be in debt for 1-5 years
  • 20% say for the next 6-10 years
  • 14% say between 11-20 years
  • 9% say for the rest of their lives

The cost of debt can add up quickly. Thus, it’s important to manage the amount and reduce the cost of your debt, and get it paid off. That way you can put that money to work for you financial freedom or toward something more fun, like your next vacation or retirement.

“Rather than lamenting you have too much debt, imagine how much better your life would be with less.”

There’s almost no better way to reduce your expenses and save money than unloading credit card debt. Ridding yourself of this high-interest debt offers returns that few investments can match over multiple years. Even though the S&P 500® has long-run average annual returns of 10%, most people should only expect to earn about 6% a year on average because they’ll hold a mix of assets (including bonds) that lowers their overall risk (and expected returns).

Here are several recommendations to assist you manage your debt and to think through what’s best for you and your money, according to Northwestern Mutual:

  1. COME TO GRIPS ABOUT SPENDING – Debt can pile up for all kinds of reasons. Paying it down should be pretty straightforward — but for that to happen you have to be honest about your spending. Putting your spending into perspective can help you manage and develop a plan to get yourself in better financial shape.
  2. GIVE IT A POSITIVE SPIN – Rather than lamenting you have too much debt, imagine how much better your life would be with less or none. Then set specific financial goals with a focus on debt reduction and elimination.
  3. AUTOMATE YOUR PAYMENT PLAN – Put as many of your credit card and/or loan payments on auto-pay from your checking or savings account. That way, you’ll be sure to avoid any unnecessary late fees.
  4. PRIORITIZE, PRIORITIZE – If you can’t pay all your debts each month, prioritize what you can pay. Give high priority to debts secured by a house or car, necessities like utilities and debts you can’t discharge, including student loans and unpaid federal taxes. Then tackle unsecured debt like credit cards. You’ll want to identify the credit card with the highest interest rate and pay that one off first. That way, you’ll save yourself money by avoiding unnecessary and excessive interest rate charges over the life of your debt.
  5. PAY AS YOU GO – It may seem old fashioned, but avoid paying with plastic and start using cash, check or debit card instead. Sure, it will take a little extra planning to make sure you have sufficient cash in your wallet, but doing so can help you clearly connect to where your money goes each day. It may also help you avoid impulse purchases and other unwise spending.
  6. MAKE MORE OF YOUR INCOME – Many people believe they don’t have enough money to put toward debt reduction. Ask yourself: Do I really need a latte every morning, or special cell phone services? Sticking to a budget isn’t easy, but if you save small amounts, you’ll be able to pay off your debt that much faster.
  7. DON’T LOSE SIGHT OF RETIREMENT – Paying off debt isn’t a free pass to put your retirement savings on hold, especially if your 401(k) at work offers a company match. Even if you’re paying off a high interest rate on your credit card debt, the employer match on your retirement savings makes your retirement plan contribution the better deal.

When it comes to your retirement, you want to make your money work for you. That’s where investing becomes most important. Sometimes, saving and investing makes more sense than paying off debt. With the interest rate on your debt below 6%, you may want to pay off that debt on schedule rather than making extra payments.

As an added incentive, the tax advantages of investing through retirement accounts like 401(k)s and IRAs can help your money go further over time than it would by paying off debt early.

Plus, you can only contribute so much each year to retirement accounts. Every year you don’t contribute is a missed opportunity to save. With many workplace plans, you also miss a chance to earn matching contributions—i.e., free money—from your employer. And thanks to compounding, the earlier you save, the more your investments could grow over time.

Personal debt has its purposes and financial benefits until it becomes unmanageable and you have trouble paying it off. In the worst case scenario, debt can result in you going bankrupt if you’re unable to make your monthly credit card or mortgage payments.

The pandemic has put some Americans behind and has allowed others a chance to gain some ground on their debt. Specifically, 34% say it will take them longer than expected to pay off their debt because of the pandemic, while 23% expect to be able to pay it off sooner.

When it comes to paying off debt or saving money for emergencies, retirement and other goals, your financial priorities will depend on several factors. These include the types of personal debt, their interest rates, your disposable income and your long-term goals. You can weigh your options, depending on how much debt and how much money you already have saved for the future and invested to for the long term.

References:

  1. https://news.northwesternmutual.com/2021-08-25-Northwestern-Mutual-Study-Finds-Americans-Personal-Debt-Has-Dropped-More-than-20-Over-the-Last-Two-Years
  2. https://news.northwesternmutual.com/planning-and-progress-2021
  3. https://www.prudential.com/financial-education/how-to-pay-off-debt-and-save
  4. https://news.northwesternmutual.com/2018-08-14-New-Data-Personal-Debt-On-The-Rise-Topping-38-000-Exclusive-Of-Mortgages
  5. https://article.smartasset.com/financial-advisor-secrets-1/

Understanding Your Credit

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Building credit is an important part of your financial life.

Credit is effectively your reputation as a borrower, made up of information about your borrowing and repayment history. Good credit histories generate good credit scores and are rewarded by lenders with lower rates and favorable terms; bad credit can cost you.

Stack of credit cards and american dollars, close-up view. Horizontal financial business background.

Your spending habits—including purchases made with credit cards, as well as payments for insurance, car loans, utilities and cell phone bills—are the blueprint for your credit history and can make or break your reputation as a borrower.

Paying bills on time and in full is key to good credit and makes it easier for you to secure a mortgage, car loan or private student loan in the future.

Paying late or defaulting on payments is a red flag for lenders. If you have poor credit history, you’ll likely be seen as a risk and may not get a loan or credit card, or may be given one with a higher interest rate.

In addition to helping you get a loan, credit can affect other aspects of your life, from renting an apartment to getting hired for a job. Why? Just like lenders, if landlords or employers see a low credit score, they may perceive you to be financially irresponsible and too risky to take on.

Credit: Histories, Reports & Scores

You need a history of responsible credit use to establish a solid credit history and credit score.

For many, the terms “credit history,” “credit report” and “credit score” may appear interchangeable. In fact, they are three separate entities that are directly related to one another.

  • Credit History: an unofficial record of your debts and repayments
  • Credit Report: an official record of your credit history collected from sources like lenders, utility companies, landlords and collection agencies, and compiled by the three credit bureaus, Equifax®, Experian® and TransUnion®
  • Credit Score: a statistically calculated numeric value indicating your creditworthiness based on the information contained in your credit report. While there are several credit-scoring formulas, FICO® (the acronym for Fair Isaac Corporation, the company that provides this model to financial institutions) is the most widely recognized. Scores range from 300 to 850, with under 400 typically indicating very poor credit and above 670 demonstrating you’re a responsible borrower.

Scores are available for lenders, landlords and others to use in assessing if you’re a good financial risk to take on. Ranges of scores are often translated into quality ratings, such as good, fair and poor. While ranges may vary by lender, here is an example of how scores may be broken up:

Score Range Rating
800+ Exceptional
740-799 Very Good
670-739 Good
580-669 Fair
580 and less Poor

*Scores are based on the Understanding FICO® Scores Booklet. Lenders may use other qualifying ratios and factors when approving loans. Speak to your lender for more information.

Credit Card Limit

Credit cards are a form of borrowing, like a short-term loan

It’s important to know what the credit limits are on your credit cards and where you stand, because the percentage of credit you have available can impact your credit score, for better or worse.

When you’re approved for a credit card, you’ll be given a pre-set limit of how much money you can put on the card. Keep in mind that you’ll be charged interest on your purchases if you don’t pay your bill in full each month. If that balance creeps up, the interest can push you above your limit.

Credit Utilization and Your Overall Credit Health

It’s easy, purposely, for you to pull out your credit card to buy items you want or need. If you pay that debt off each month, it won’t negatively affect your credit. However, if you keep a balance on one or more cards, it can start to reduce your credit score due to a high credit utilization.

Credit utilization is the sum of the debt you have on all your revolving credit—essentially, your credit cards and lines of credit—divided by your limit. Many experts recommend to keep credit utilization below 30%, but lower is always better since it’s an influential part of figuring your credit score.

Understanding Credit Facts

  • Income has nothing to do with your credit score and isn’t even reported to the credit bureaus, so it’s not listed on your report.
  • Bankruptcy does not erase bad credit history. Although declaring bankruptcy frees you from paying back all or part of your debt, the delinquent accounts aren’t deleted from your credit report. Instead, they’re added to show they were included in bankruptcy and can remain there between 7 and 10 years.
  • Negative information and late payments remain on your credit report for seven years from the date of the initial late payment. The effects of these black marks on your credit score will, however, lessen over time.
  • Paying cash for everything isn’t better than using credit responsibly. You need a history of responsible credit use to establish a solid credit history and credit score. If you don’t establish and maintain various types of credit accounts, your scores won’t be as good as someone with a long history of responsible credit use.
  • You can’t hide debt. Having many credit cards affects your credit, as does the amount of debt you carry. You can opt for a balance transfer to help you save money and pay off your loan faster by moving debt from a high-rate card (or cards) to a low-rate card. Balance Transfer is the balance of money owed on one credit card transferred to another credit card, generally to take advantage of lower interest rates.

Effect on Credit

“Most American’s spending habits are based on the amount of available credit they have, and not on their pay check, cash flow or checking account balance.”

Credit cards are known for their convenience, safety and dependability, but did you know they also offer excellent financial benefits that cash just can’t beat? When used responsibly, credit cardholders can maximize their financial opportunities now while making a positive impact on their financial future.

How you use a credit card affects your credit history and can effect one aspect of your credit report. So it’s really important to create a credit history that reflects responsible and intelligent financial habits.  You can take positive steps to build a positive credit history:

  • Use your card regularly
  • Make your payments on time
  • Keep your balance below your limit
  • Continue to use your credit card over an extended period of time
  • Regularly read your credit report to make sure it’s error-free

When you practice these tips and responsibly use your credit card, you’ll improve your credit and may even get a higher credit limit. With a higher credit limit and the same responsible practices, you can maintain a low debt-to-credit-limit ratio and further improve your credit standing—which will give you the opportunity to finance large purchases, such as a home, at lower interest rates.

Why Would I Want to Increase My Limit?

There are several reasons you may want to consider asking your creditor for an increase, including:

  • When your credit has improved. If you got a credit card at a time when your credit was on the low side or just starting out, chances are your limit is small. If you feel your credit has improved, now may be an appropriate time for an increase.
  • When you want your credit to improve. As mentioned before, a high credit utilization can hurt your credit. Increasing your credit limit would reduce the utilization numbers and possibly increase your credit score, provided you don’t increase your balance as well.
  • When you need to buy a big-ticket item. Should you need to cover a larger expense that you’d like to budget for and pay off over time, such as a new water heater or vet bills, a credit limit increase can be helpful. If you’ve been diligent in paying your credit card bill, your creditor may approve an increase that can take the stress off your purchase.

Before You Ask

It could cause a temporary drop in your credit score. Although an increase in your credit limit ultimately may help your credit score, it will create a “hard inquiry” on your credit history and could lower your score in the short term. If you continue paying your bills on time and keep your utilization below 30%, it should come back up.

Make sure a higher limit won’t cause too much temptation. Whether you’re asking for a limit to help increase your credit or another similar reason, be careful that you don’t overspend once your credit is increased. Being unable to make payments or keep your utilization level low could cause long-term problems you didn’t intend on facing. Be mindful that those are the two most important factors in credit scores.

Items Taken Into Consideration

When you ask for an increase, the creditor will usually take the following into account before making their decision:

  • Account age and standing
  • Time since last increase request (avoid asking frequently; space out your requests)
  • Annual income
  • Employment status
  • Payment history

In some instances, the company will ask you how much of an increase you’re asking for. Be realistic in order to increase your chances of approval. Once you’ve asked, you’ll usually get an answer quickly—sometimes even instantly if you apply online or through your bank’s mobile app.

Credit is a financial tool, debt is bad.

References:

  1. https://www.navyfederal.org/makingcents/knowledge-center/credit-cards/articles/6-benefits-of-using-a-credit-card.html
  2. https://www.navyfederal.org/makingcents/knowledge-center/credit-cards/how-credit-cards-work/credit-card-basics.html

Personal Debt in America

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“Debt means enslavement to the past, no matter how much you want to plan well for the future and live according to your own standards today. Unless you’re free from the bondage of paying for your past, you can’t responsibly live in the present and plan for the future.” Tsh Oxenreider, Organized Simplicity: The Clutter-Free Approach to Intentional Living

Debt stands stubbornly in the way of Americans’ financial goals and life dreams.  Moreover, debt is the biggest barrier to wealth creation and is the great destroyer of wealth. Debt and financial freedom are polar opposites – they never meet. Where there is debt, there cannot be wealth and financial freedom.

In the U.S., adults aged 18+ report having an average of $29,800 in personal debt, exclusive of mortgages, according to the latest findings from Northwestern Mutual’s 2019 Planning & Progress Study. The research also revealed that 15% of Americans believe they’ll be in debt for the rest of their lives.

While those numbers are staggering, they represent an improvement over last year when U.S. adults reported an average of $38,000 in personal debt. Still, the debt problem in America continues to run deep with wide-spread implications. The study found:

  • On average, over one-third (34%) of people’s monthly income goes toward paying off debt
  • 45% of Americans say debt makes them feel anxiety on at least a monthly basis
  • 35% report feeling guilt at least monthly as a result of the debt they’re carrying
  • One in five (20%) report that debt makes them feel physically ill at least once a month
  • One-fifth (20%) of U.S. adults are not sure how much debt they have
  • Over one in three Americans (34%) are unsure how much of their monthly income goes toward paying off their debt

Among the generations, Gen X reported the highest levels of personal debt with $36,000 on average. They’re followed by Baby Boomers at $28,600; Millennials at $27,900; and Gen Z at $14,700.

This is the latest round of findings from the 2019 Planning & Progress Study, an annual research project commissioned by Northwestern Mutual that explores Americans’ attitudes and behaviors towards money, financial decision-making, and factors impacting long-term financial security. This year marks the 10-year anniversary of the study.

The Credit Card Crisis

The leading sources of debt for most Americans is a tie between mortgages and credit cards, according to the study. An equal 22% of U.S. adults listed each as their main source of debt, more than double the next two highest sources — car loans (9%) and personal education loans (8%).

Millennials cite credit card bills as their main source of debt (25%), while Gen Z notes personal education loans as theirs (20%). Both Gen Xers (30%) and Baby Boomers (28%) note mortgages as their leading source of debt, followed by credit card bills (at 24% and 18% respectively).

Digging deeper into the numbers around credit card debt, the study found:

  • Nearly one-third of Americans (31%) are paying interest rates on their credit cards greater than 15%
  • Over 1 in 10 (12%) say they “always” pay only the minimum required payment, just covering the interest without paying down any principal
  • Close to one-fifth (19%) don’t know what their interest rate is, with Millennials being the most likely to report not knowing (22%)
  • 18% report having four or more credit cards, with Baby Boomers being more likely than other generations to have four or more (23%)

According to the Federal Reserve Bank of New York, credit card debt has reached $868 billion in the United States, and delinquencies are on the rise.

“Before you spend, earn. Before you invest, investigate. … Before you retire, save.” William A. Ward

When you are in debt the clock works against you. Every morning when you wake—weekends, holidays, sick days, birthdays and work days—you are already behind. The mortgage, credit card, car loan, et cetera, all tacked on interest the second after midnight. Long before you rolled out of bed and poured your first cup of coffee you need to work to pay the interest before you have money for food, clothing, shelter or entertainment.

In debt you are a slave; without debt you’re free.  Every day in debt you owe your master. Every day! He is a cruel, heartless master. When the clock ticks past midnight the interest for the day ahead is due.  Only those without debt and in possession of investment assets are free to live each day as they choose.

Without debt you are free; without debt and with possessing of assets and wealth, each day is yours to use as you chose.

References:

  1. https://news.northwesternmutual.com/planning-and-progress-2019
  2. https://wealthyaccountant.com/2018/04/12/the-greatest-secret-between-debt-and-wealth/