Shopping is a fun activity, particularly when it’s being done on credit. We don’t see the money leaving until the bill comes due at the end of the month, at which time, we must write a check to pay the debt.
The term debt is often used interchangeably with credit as though the two words mean the same thing. But they don’t. As discussed in the article Clarifying Misconceptions about Credit to Minimize Debt, credit is the privilege to use other people’s money to enhance our lifestyle. But a person having access to credit doesn’t mean that he or she has debt.
What is debt?
Debt is an obligation, and in this context, it is a financial obligation. When you use credit for purchases, you create an “I owe you” account with an individual or a company that must be reconciled in the future, hence the idea of paying later. More specifically, it is the balance owed on a mortgage, car loan, store account, credit card, etc.
In almost all cases, interest is charged on the balance owed. Also, the longer the obligation remains unpaid, the more interest the debtor will pay on the borrowed funds. In the end, he or she will end up paying more than the original amount borrowed.
Most people carry debt, and often, more than they can handle. According to Nerd Wallet, the average U.S. household with credit card debt has an estimated $6,929 in revolving balances.
Seemingly, the debt problem gets worse each year. The balances owed from month to month continue to rise, reaching $420.22 billion in late 2018. That’s an increase of about 5% over last year. For Americans carrying this amount of debt, the impact is significant.
One can only imagine the amount of interest that’s being paid each month on the combined debt total. But who is tracking any of that? Most of us just keep spending money with little thought about long-term financial consequences.
Debt delinquency rate
Little can be said about debt without mentioning the delinquency rate, which is the debtor’s failure to fulfill the contractual agreement as promised. In the first quarter of 2018, the delinquency rate on credit card debt to smaller banks in the United States spiked to 5.9 percent. This exceeded the peak during our most recent financial crisis.
Fortunately, there seemed to be an offset in the general delinquency trend during the same period mentioned. For large banks, the debt delinquency rate was 2.54 percent, bringing the combined delinquency rate down to 2.48 percent in the first quarter of 2018.
The root cause of financial failure
Piling up debt is a risky proposition. It was the main cause behind our 2008 financial crisis, and if we’re not careful, it will continue to destabilize our economic position and threaten our financial future, both as individuals and a nation.
The reasons for getting into debt are many: student loans, medical bills, emergencies, compulsive shopping, and others. Most often, the outcome is the same: past due bills, defaults, and bankruptcies, all of which are counterproductive for the individual who is aspiring to get ahead financially.
How to tell if you’re in trouble with debt
Do you have debt? How much is it? How well are you managing the situation? Below are some questions that will help determine your overall debt position:
If you answered “No” to these questions, your credit situation is under control. If you answered “Yes” to five (5) or more questions, you need help. Your debt to income ratio is probably too high, and you’re heading toward the danger zone—default or something worse.
If that’s the case, here are a couple of options you need to consider:
- Apply for a debt consolidation loan. The loan will pay off outstanding balances and leave you with just one payment, often at a much lower interest rate than you’re currently paying.
- If you have difficulty obtaining a loan, contact a Consumer Credit Counselling Agency. The agency will consolidate all your unsecured debt (not personal loans), help with budget planning, and provide free education to help you avoid additional problems.
To learn more about debt and its impact on your financial future, consider reading my new book: Pennies to Power: How to Use Your 20’s to Gain Financial Independence for Life.
Thanks for reading.
What are your thoughts?
Most of us like the idea of having access to money through credit, but few of us like the aftermath—the debt portion that comes with the use of credit.
- Why is this?
- Is it possible to have too much debt?
- Is it possible to use credit without incurring debt?