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America’s debt has been steadily rising over the last few years. It’s now estimated that America’s household debt has surpassed the all-time high reached during the economic meltdown of 2008. The Federal Reserve Bank of New York says the accounts that make up most of household debt are overwhelmingly credit card accounts, and this number is growing. Now that the economy has started to boom after years of stagnation, it’s estimated that America’s household debt numbers will continue to soar.
It’s no wonder that America has a debt problem. Largely, American consumers are an undisciplined group when it comes to money. Not only are they spenders, they’re also very poor savers. Now that it’s a lot more expensive to chase the American Dream, U.S. consumers are racking up debt at a record pace.
Common Reasons for Soaring Debt
While most debt problems originate from irresponsibility, overspending, and living above one’s means, numerous other reasons exist that explain why consumers fall into debt, sometimes through no fault of their own. Let’s examine a few.
Cost of living not keeping up with consumer income
For the last 10 years, the growth of income in America has been almost non-existent in most areas of the country. That hasn’t been the case for the cost of living, which has steadily risen year after year. When income growth doesn’t keep up with the cost of living, consumers often feel the pinch in their monthly cash flow and have real trouble making ends meet. This cash shortage often makes consumers turn to credit cards in order to make ends meet. It also can mean that families are unable to save money, so when there’s an emergency or other unexpected expense, they have no choice but to utilize credit to take care of it.
One of the costs of working families is the high cost of childcare. If there are several children in the family, these costs can often make it impossible for both spouses to work. These working families can find themselves stuck between a rock and a hard place, having no way to increase their monthly income even though expenses continue to rise. Unless they have a family to rely on who can help with childcare, they can find themselves racking up a substantial amount of debt.
Credit has been easy to obtain
After the financial meltdown that started in 2007, credit became very hard to obtain because lenders tightened their lending standards considerably. Many thought this only applied to mortgages, but that was not necessarily the case. Across the board, whether you were applying for a credit card, a personal loan, or a car loan, you had to have very good credit to get a loan with a decent interest rate. Due to the extended time during which consumers had difficulty obtaining credit, the amount of consumer credit in America decreased considerably. However, as the country has recovered from the financial crisis and consumer credit scores have improved, credit has become much easier to obtain.
In addition, after so many consumers were forced to put their financial lives on hold during those years of the financial crisis, as credit eased, they found they were now able to upgrade to a larger home, replace their home furnishings, or buy a new car. This created many new consumer loans and revolving credit accounts. The low-interest rates of the past few years have only made having and managing these accounts easier. With the economy heating up, and inflation fears putting upward pressure on interest rates, consumers will now see their cash flow affected by higher payments in the future.
Expenses have been on the rise
With the economy continuing to grow, consumers are likely to see inflation drive up the prices of everyday items and the cost of expensive items such as automobiles, home furnishings, student loans, and mortgages. Also affected will be the interest rates they pay to finance them. Rising inflation will also drive up the cost of housing, not just in the home-buying market but also in the rental market as well. Combined with the increase in everyday expenses such as food, gas, and entertainment, even improving income growth may not allow consumers much breathing room.
As expenses rise, consumers may find themselves in difficult circumstances. For instance, they may see payments on their student loans rise to the point that they may not be able to afford them, or they may be in a home that they can no longer afford but lack the financial resources to move into more affordable housing. This could mean that they need to turn to credit cards just to get by.
It used to be “common knowledge” that half of all marriages ended in divorce; today, that’s not necessarily true (various sources dispute whether that was EVER true, but that’s a story for another time). Regardless, the divorce rate has fallen recently to almost a 40-year low. Moreover, although the rate of marriage has dropped, it’s only because people are marrying later in life. The result of this is that these couples tend to stay married. The rate of divorce drops significantly for those who marry past the age of 25.
Money always plays a key role in a marriage. Those with lower incomes tend to have a higher rate of divorce than those in higher income brackets. Education also plays a role as consumers with college degrees report longer, more successful marriages than those who never got a higher education.
Although the rate of divorce has declined, many couples still suffer from the financial impacts of divorce every year. In most cases, finances are already an issue in the marriage, and the financial strain of separating households and dividing assets only makes the situation much worse. Once divorced, single parents trying to get by on one income may turn to credit cards to make ends meet.
Difficulty in managing money
In America, students in school get little to no education or training in the principles of money management, saving, and investing. This means that those graduating and going out into the world do so lacking the knowledge to manage or budget their finances. Additionally, many students take on huge amounts of student loan debt just to get through school. Because of this, they can find themselves already in the hole as they’re starting out in life. The job market of the last decade has been relatively stagnant, compounding the problem even further.
This is how many young people get into trouble with credit card debt. With credit cards so easily accessible, it’s an all-too-tempting method to manage cash shortfalls month to month. These young people have not been equipped with the skills to manage their money, reduce expenses, or find ways to increase their income, so their financial picture can deteriorate quickly.
Being unemployed or underemployed
Losing a job can be a devastating event for anyone, but that’s especially true for families living on one income. If the job loss is sudden and complete, meaning there’s no severance pay, a family may find itself in very difficult financial circumstances almost immediately. Even if there are resources available to help, such as unemployment compensation, that’s generally woefully inadequate to cover the family’s needs. Under these circumstances, credit cards may be the only way these families have to survive.
Many times, those that lose their job will take a lower paying job in the meantime while looking for a job that adequately replaces the lost income. This is called being underemployed. Unfortunately, with the sluggish economy of the last decade, this was a very common occurrence in America. While having any job is better than having no job at all, being underemployed can cause a family to accumulate quite a lot of debt.
Addictions, such as alcohol and gambling
An addiction to alcohol, drugs, or gambling can have terrible and significant financial and emotional impacts on individuals and families. These impacts can be far-reaching, and will most definitely affect the finances of the individual and those around him or her.
Addicts, unfortunately, as a by-product of their disease, lack the ability to put the well-being of themselves, much less the well-being of their family, ahead of fulfilling the needs of their addiction. This can lead to financial ruin, divorce, and many other adverse circumstances.
One particular addiction that can create immediate havoc on a family’s finances is an addiction to gambling. In today’s world, a gambling addict has the ability to place bets over the Internet simply by using a credit card. This means that a large amount of money can be lost in a very short period. Many times, gambling addicts will hide their activity from family members who only find out after the addict has sent the family into financial ruin. The activity will usually only stop when the credit cards hit their limit and the cash has run out.
Many times, debt accumulates due to an unexpected medical issue such as an illness or injury. Even with good insurance, quality healthcare can be expensive when it comes to deductibles, copays, and out-of-pocket expenses. If the illness or injury prohibits someone from working, the problem can become serious quickly. This is also true for someone who has to take time off from work to care for a loved one.
Many times, the sick or injured person will have no choice but to turn to credit cards to foot the bills owed to medical providers, or to cover the shortfall in income. Medical costs are expenses that, many times, an individual has no choice but to pay immediately. Prescription expenses, for example, cannot be put off. Those with hospital bills should look to negotiate their balances as best they can. Many times, a discount will be given for upfront payment, or a payment plan arranged.
Little to no savings
Because many Americans have very little savings, they’re generally unprepared when an unexpected expense hits their budget. Alternatively, if they lose their job or have an unanticipated injury or illness that prohibits them from working, they have nothing to fall back on. This can lead to the overuse of credit cards and therefore the accumulation of debt.
Many financial advisors recommend building an emergency fund that consists of roughly three months worth of expenses. While this may seem like an impossible task, many consumers have found creative ways to fund their emergency savings accounts. Taking on a second job or starting a side business is an excellent way to get your emergency fund started. In addition, generating cash by selling items you no longer need or want can help you begin to build your emergency savings account. You can utilize garage sales, Craigslist, or online auctions to help you sell your items and generate cash.
America’s debt problem is a big one for sure. Consumers who find themselves in a mountain of debt face a steep uphill climb to get themselves out of it. If you do find yourself unable to cope with your debt problem, know that solutions do exist. Debt consolidation, DIY payoff strategies, and working with a debt relief company are all possible solutions to resolving a debt problem. It will be interesting to see how America’s economy grows considering the high debt load.