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The American Household Debt Crisis: Improving, But Far From Over

cartoon of American debtThe consumer debt problem of Americans had always been viewed as a cultural thing. As sad as it may seem, Americans are known for being overspenders. Our culture gave us the notion that bigger is better and more is always merrier. Unfortunately, this mentality got us under so much household debt during the Great Recession.

It may seem like the economy is improving but the latest report from the New Your Fed reveals that the consumer debt is steadily increasing in the first quarter of 2014. According to the article published on Liberty Street Economics blog of NewYorkFed.org, there is an increase in the willingness of lenders to lend money. They allowed longer payment periods and they loosened the restrictions that used to hinder consumers from borrowing money. That means the credit supply is increasing and consumers are well aware of that. That is one of the factors driving up the level of household debt in the country.

The American consumer debt is improving compared to other countries

But while the debt is higher, a report from the OECD or Organisation for Economic Co-operation and Development revealed that compared to other countries, the US is one of the few who showed that their credit level is going down. The report from the OECD-iLibrary.org revealed that both United Kingdom and United States household debt fell by 24% between 2007 and 2011. The other countries like Netherlands and Greece increased their debt level by 41% and 34% respectively.

The same report also mentioned that the ratio of the household debt versus the net disposable income is highest in Denmark at 135%. The countries following the statistics include Netherlands, Ireland, Norway and Switzerland. The lowest recorded ratio comes from Slovak Republic at 49.4%.

What does this mean for all of us? Does it mean we do not have to worry about anything when it comes to our finances? Have we finally started to apply the right financial and credit management skills?

Well that is still too early to determine at this point. There are conflicting data that will tug at opinions about our ability to manage our money.

On one side, we are exhibiting better recovery and debt growth statistics compared to our neighbors. But that does not mean we should take this lying down. The New York Fed said that our debts are still rising. Unless we have successfully lowered our debt amount, which is still more than a trillion dollars, we cannot assume we are past the danger zone. It is too early to say that we have wiser financial practices – but we cannot erase the fact that we are improving. That means we still deserve a pat in the back.

An article published on FoxBusiness.com discussed an interesting idea about our debts. They mentioned that although American household debt rose to $129 billion during the first quarter of 2014, it is not so bad. Although it increased for three consecutive quarters to $11.65 trillion, it is still below the peak of the 2008 financial crisis.

Not only that, the article mentioned that credit card delinquencies continue to decline. That means Americans are paying off their debts. They may be racking up debt, but this is debt that they can afford to pay. At least, at this point, more people are financially able to live comfortably and keep up with their payments at the same time. This apparent credit confidence is viewed by economists as a good sign.

In a country whose economy is 70% driven by consumer spending, this bodes well for businesses. It means people are in a financial situation that makes them more confident to make purchases. And when they make more purchases, it will lead to higher profit for a lot of businesses. When businesses are earning well, employees are compensated and have higher job stability. That can put households in a better position to increase their respective net worth.

The Fox Business article quoted experts who say that higher debt levels with lower delinquency rates is reflective of a better economy. But this does not mean we should encourage taking on more and more credit. There should still be a cautious approach to applying for more debt. Do not do it to upgrade your lifestyle unnecessarily. It makes sense to take on credit for a new home but make sure that you will not make it excessive. Do not buy a bigger home using credit when you can live in a smaller home and be free from mortgage debt sooner than later. Refrain from buying a vehicle that is flashier than you need it to be.

How to keep debt at home low

In all intents and purposes, you want to keep your household debt in manageable amounts so that when the economy turns south, you will not be as crippled as you once were during the Great Recession. Although consumer debt indicates financial confidence, you need to be smart about it.

We are not saying that you should completely remove debt from your life. There are debts with the potential to jumpstart your net worth. These include mortgage loans and student debts. But make sure that you borrow only what is necessary and do not base it on what your current income can afford to pay off. If something happens to your job, that can leave you with mountains of debt that you cannot afford to pay back.

So to help keep your household debt from leading to your financial demise, here are four tips that you can implement.

  • Budget your credit card spending. Making credit card purchases is good for your credit report but make sure that you include it in your budget. It can only be beneficial to your credit score if you can pay it back in full during the grace period. It also means you do not have to worry about additional financial charges that will make you spend more than you should. When you plot your credit card spending in your monthly budget, you will be able to put aside the money that will allow you to pay it back in full once the bill comes in. It will also give you a limit as to how much you should be spending on your card each month. That will keep you from the temptation of overspending your card purchases on things that are not necessary.
  • Make one expensive purchase at a time. There are times when we need to make expensive purchases on electronics, home repairs, gadgets, etc. There is nothing wrong with this. But make sure that you schedule it well. If you see a great sale on a TV but you know that the AC unit in your home requires replacement, you need to prioritize. Make one expensive purchase so you will not compromise your budget for the month. Know the schedule of your purchases so you can save up for it and buy them in cash instead of credit. Reserve your credit for expensive expenses that happen unexpectedly – e.g. blown transmission, busted taillights, etc.
  • Boost your emergency fund. Another effective way to keep your household debt from increasing is to grow your emergency fund. That way, any unexpected expense will not have to compromise your budget significantly. You can keep it from destroying your financial schedule and force you to be in debt. Planning and preparation is the key to a healthy financial life.
  • Get debt help. When you have more than enough debt to deal with, you also have the option to get debt help. There are many debt relief programs that can help make your monthly credit payments a lot easier. You have debt consolidation, debt management, debt settlement and balance transfer. You have the option to hire a professional to help you out or you can do it all yourself. In case you plan on getting debt help from a professional, make sure that you know the laws protecting you from abusive ones.

It may be true that the American culture dictates that household debt will always be present. But that does not mean it should be allowed to grow significantly that will put us in danger of another financial meltdown. We need to learn from our past mistakes and use that knowledge to improve our financial future.

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