Debt is a necessary evil. Many of us simply cannot afford to purchase big-ticket items without access to lines of credit. Personal loans, business loans, and credit cards are the most common ways of accessing credit in the financial markets. Since the 2008 global financial crisis, US household debt has risen to unprecedented levels. Today, credit card debt levels alone exceed $1.02 trillion. Surprisingly, the US economy is firing on all cylinders and burgeoning debt levels do not appear to be adversely affecting the economy.
Unfortunately, on paper everything appears to be fine. It’s because the wealthiest households are thriving, and it paints a skewed picture for the rest of the economy. Middle-class people and low-income earners are dealing with reduced personal disposable income levels, owing to increasing credit utilisation. Household debt now exceeds $12.84 trillion, accounting for 67% of Gross Domestic Product (GDP). The US economy is booming under President Donald Trump and his business-friendly policies, procedures, and tax regulations.
According to the Survey of Consumer Finances by Deutsche Bank, the median leverage ratio by income percentile group has only increased slightly since 2007, and is now 0.36, up 0.06 from 10 years ago. Simply put, this means there the US economy is being driven by the upper percentile of wealthy people. The Fed has targeted a 2% inflation rate, and all signs point to this being reached. Yet, household debt remains a problem.
Why is Household Debt a Problem?
When debt exceeds a certain threshold, it becomes incredibly difficult to maintain a business as normal approach to things. The latest reports indicate that the average US household owes approximately $15,654 in credit card debt. With the year closing out, there is no doubt that alarming debt levels are going to follow us into the New Year. For example, student loan debt now tops $1.36 trillion, automobile loans exceed $1.21 trillion, and mortgage-related debt is now hovering around $8.74 trillion. These debt levels are indicative of long-term trends in the US economy – that being a credit fueled spending spree. Unfortunately, many of the problems related to rising debt levels are coming from medical bills being placed on credit cards.
In 2016, a survey was conducted by the Kaiser Family Foundation which found that 37% of people surveyed had higher levels of credit card debt due to medical bills. This is backed up by the BLS (Bureau of Labor Statistics) which confirms that medical and healthcare costs have increased by 34% since 2007, compared to a modest increase of just 20% in income growth. Clearly the divide is creating additional debt burdens on US households. Housing costs have increased by 20%, and the costs of food have increased by 22%. Some folks feel that the Fed has not helped matters by increasing interest rates since 2015. With every 25-basis point rate hike, the total debt burden on US households increases.
Best Way to Deal with Debt
There are some solutions in the form of debt mitigation, debt management and debt consolidation. The latter is a useful way of reducing the overall interest-related burden on debt by consolidating at a lower interest rate, or a 0% interest rate by switching debt over to a low interest rate card. According to various surveys, approximately 18% of Americans pay off their credit card balances in full every month. This means that lots of debt is being carried over to the next month, and beyond, incurring interest-related charges. It is easy to understand how to manage debt by following the stage advice of debt management consultants. For example:
- Always live beneath your means – avoid the urge to splurge
- If you cannot afford it – wait until you have a plan to make payments
- Prioritize your expenditures on a timetable from most pressing to least important
- Debt consolidation loans are a useful resource to reduce your debt repayment amounts
- Use 0% APR credit cards wherever possible, and shop around for low interest-rate cards
These tips, tricks and strategies can go a long way towards reducing your debt burden and allowing you to enjoy a debt free life in the future.