DEBT MANAGEMENT | By Erika Young
First, let me start by saying that “Credit isn’t the enemy”. How we manage credit is what determines if it is good or evil. As of July 2015, based on an analysis of Federal Reserve statistics and other government data:
Average credit card debt: $ 15,863
Currently, American Consumers owe $11.86 trillion in debt, an increase of 1.9% from last year, $901 billion in credit card debt,
Average mortgage debt: $156,584
$8.17 trillion in mortgages,
Average student loan debt: $ 33,090
$1.21 trillion in student loans, an 8.5% increase from last year. So you are not alone!
Credit issues and debt generally does not develop overnight. It takes time to amass these large quantities of debt.
Recognizing The Type of Debt You Have
There are a few types of debt:
- Debt secured by a home can be a Mortgage, Home Equity Line/Loan
- Line of Credit i.e. Overdraft Protection where you can draw down on a monetary line, usually by writing a check, repay it and use over again
- Installment Debt i.e. Auto Loans, where funds are received upfront, in a lump sum and gradually paid back. Typically the same amount each time.
- Credit Card debt, also known as Revolving Debt, is similar to a Line of Credit, however, its drawn down by using a credit card.Debt can amass for many reasons. Here are a few:
- Not following a budget
- Not reducing expenses when income decreases i.e. loss of employment
- Insufficient emergency funds
- Medical expenses
- Lack of financial communication i.e. perhaps its your spouse spending while you save
Understanding Your Current Financial Situation:
Once you have identified the cause of your debt, then you must determine your cash flow. Simply put, you can not begin to lower your debt if you do not know what you are working with financially. To do so, you must first understand Cash Flow = Income – Expenses. Income being any type of monetary compensation, investments and or alimony. Expenses can be broken into two categories, Necessary (Mortgage/Rent, Utilities, Groceries, etc) and Discretionary (Entertainment, Vacations, Gifts, etc). And yes, vacations sometimes fall in the necessary category but then those are stay-cations! After you subtract your total expenses from your income, then this is the remainder of what you’re working with to use towards your debt.
Next, create a budget and determine what expenses are fixed and variable. Fixed expenses are the same every time you make a payment such as with a Mortgage or Auto Loan. Variable expenses are often determined by usage such as groceries and utilities. This will help you better categorize your expenses and evaluate your cash flow. Whenever possible use your ATM card when paying for things to also help you keep track of your spending down to the penny!
Establish A Plan To Avoid, Reduce and Eliminate Debt
- Stop accumulating debt! Utilize credit cards for emergency purposes only
- Keep current with debt repayments. Try to pay more than the minimum but NO LESS THAN the minimum. Falling behind on payments can cause current interest rates on existing debts to increase on ALL of your cards. It can also adversely affect the terms of future borrowing. Payment history accounts for 35% of our credit score
- Pay extra on highest interest rate debt first. The higher the interest rate the higher the payment is
- Transfer balances amongst your lower interest rate cards, whenever possible