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A strong connection exists between your location and your level of credit card debt. With each state having its own unique economy, several economic factors play a key role in determining which states have the highest amount of debt. Expenses such as housing, taxes, and energy costs all vary from state to state, influencing the cost of living and the financial picture of its residents.
Overall, credit card debt in America continues to grow. According to the New York Federal Reserve's reports on consumer debt, American consumers hit a new high at the end of the first quarter of 2017, surpassing the previous high mark seen at the beginning of the Great Recession in 2008.
Now, with the economy starting to percolate and show signs of life, consumers are feeling good about spending money. In addition, banks and other lenders are relaxing their lending practices after years of overly stringent credit practices. While this is good for the overall U.S. economy, it also contributes to the growth of debt among consumers.
There are many reasons American consumers find themselves in debt. While having a suffocating amount of credit card debt isn’t good, obtaining an affordable mortgage to buy a home is often a smart investment. Taking out a student loan to earn a degree that will increase your earning power may also be a smart decision. Regardless of the reason for debt, there is a simple way to determine whether a consumer is carrying affordable debt or unaffordable debt.
Debt-to-income ratio has long been the standard for lenders in evaluating a potential borrower. Debt ratios that exceed 36% of income are unaffordable, according to experts. Debt-to-income ratios are also a way to determine which states have the highest amount of debt, as seen in a recent study performed by CNBC. Their results determined which states carry the highest amount of debt, and why.
Income plays a key role
One of the key findings in the study was that income plays a very big part in a state's average debt level per capita. There was a direct correlation between the amount of average debt per consumer and a state's average level of income. In fact, it showed that the higher the average income of the consumers in a state, the higher the debt levels proved to be.
Mortgages were the most prevalent amount of debt in states that had a higher average income. Conversely, the states with the lowest average income per capita had most of their debt in credit card debt.
California leads the nation in debt-to-income ratio
It is really no surprise that California has the highest debt-to-income ratio in the nation. The exorbitant cost of housing puts the residents of California at an extreme disadvantage compared to other states in the nation. Residents pay a very disproportionate amount of their income towards housing in the form of a rent or mortgage payment. Although the average salary is high in California, it doesn't make up for the extremely high cost of living. Everything is expensive there: housing, energy, food, gas and state and local taxes.
One of the most critical aspects of California's financial state is the fact that most of its citizens have little to no savings to fall back on in the event of a job loss or other financial emergency. This puts citizens of the Golden State at an increased risk of financial ruin.
What does the debt-to-income ratio really mean for consumers?
The debt-to-income ratio is a very important measure for consumers to consider when evaluating their own financial security. The lower your ratio, the more affordable your debt is. When your debt-to-income ratio is low, you are better able to weather any financial obstacles and crises that may come along. Additionally, when your financial picture is more stable, you have more flexibility to make life changes that may be appealing to you.
To live comfortably, it's important to keep our debt-to-income ratio low. Otherwise, you may find yourself struggling month to month to make ends meet. Being on a financial treadmill is a difficult place to be; avoid it if possible. Discover your debt-to-income ratio and strive to keep it low so you can enjoy a higher level of financial security.