Have you ever wondered why it is so hard to get out of debt?
While it’s relatively simple to get into debt, consumers frequently find that getting out of debt is far more difficult. In fact, many people feel the deck is stacked against them when their debts keep mounting with no apparent way to beat the debt cycle. So, why is it so hard to get out of debt?
Understanding the Figures – Total Credit Card Debt
Many companies profit when consumers get into debt. These companies tend to make it easy to obtain loans and credit cards. Of course, consumers must demonstrate, to some extent, their ability to get out of debt. However, lenders of all kinds approve loans even when a borrower’s ability to repay is somewhat questionable.
After the economic meltdown of 2008, many lenders did, indeed, tighten requirements for borrowing, but that hesitance diminished significantly as financial conditions showed signs of improvement in recent years.
Industry statistics show the total credit card debt in the U.S. has increased dramatically, surpassing the $1 trillion mark in 2017. The average U.S. household is now saddled with in excess of $6,375 in credit card debt. How did that happen, and what’s in store for families struggling to stay afloat today?
When getting out of debt is a problem, it’s also important to understand that credit card debt is only one aspect of household debt, with student loans, mortgages, and automobile loans also being prime contributors to the debt issues people are facing today. In addition, the costs of health insurance and medical care also impact many families.
How Do People Get Into Debt?
That’s actually a very complicated question since, as alluded to above, there are several reasons people accumulate significant debt in the United States. To better understand how debts accumulate so easily and are increasingly difficult to repay, it’s important to explore the sources of debt.
The Cost of Living Is Always Important
Housing, food, and utilities are just a few examples of expenses that always seem to be rising regardless of other conditions. Yes, home prices did go down briefly as a result of the recent recession, but housing costs have rebounded in most regions and continue to rise.
Not everyone buys homes and those individuals are, therefore, seemingly immune to the increasing costs of housing inventories around the country. But, is that really true? Rental experts point to statistics documenting numerous cities around the country where rents have increased nearly ten percent in the past year alone.
That figure is significant and is relatively easy to explain when the prices of homes sold in that same time period are noted. Real estate professionals noted steep increases in home prices during the opening months of the year, and the figures at the year’s end are expected to at least equal the increased costs of renting.
Food costs are relatively stable when compared with the costs of housing, but individual product segments are expected to see significant increases throughout 2017 and into 2018. Meat costs, for example, have risen by 10%. That means families will either pay more or be forced to adjust their eating habits.
Utility costs are also important, as families must heat and cool homes as well as keep electrical devices operational. Since 2005, the cost of electricity in the United States has increased significantly, with the current national average being roughly .13 per Kwh. On the bright side, the cost of natural gas has remained low as new sources are exploited. However, the costs of LP gas have seen rapid increases in recent years.
Expenses have, in most cases, increased faster than income in recent years. In fact, real income, when adjusted for inflation, has remained nearly stagnant for years, with only modest increases being noted since 2008. That means real, spendable income has not seen any real increase for quite some time while expenses continue to go up.
How Debt Loads Rise for Individual Households
When real income doesn’t increase while expenses do, it’s pretty easy for families to find themselves short of cash. Borrowing money seems to be the only real solution for families to pay their routine bills, provide new clothes for family members, or pay for emergency car repairs or medical expenses.
Using credit cards is an easy way to accomplish those ends, but that means the bills rolling in will include higher balances that must be repaid. In cases where multiple credit cards are regularly used, even minimum payments become harder to pay. Interest rates are frequently topping 22 percent and often ranging nearer 30 percent. The cost of credit card debt is high for many borrowers.
Emergencies also come up that further complicate the income-to-debt ratio of borrowers. Medical debts are a good example, with copays and deductibles continuing to increase. Car repair expenses are also increasing rapidly, and fewer repairs can be made by owners. Every time an emergency occurs, the debt total increases, which makes repaying those debts more difficult.
Employment situations are also major factors in the ability to get out of debt. If a worker must find another job in a tight job market, the wages may be lower than in a previous position. A reduced income further exacerbates repayment scenarios and can easily lead to borrowing even more money. However, at some point, the ability to borrow will end as credit card limits are reached. The payments won’t end, but the borrower’s ability to offset payments with additional use of the credit cards will no longer be possible.
Ending the Debt Cycle and Getting on a Solid Financial Footing
Ideally, the best way to deal with excessive debt is to avoid it in the first place. But, there are ways even those experiencing high debt loads can reduce or eliminate those debts. However, getting rid of debt requires determination and the willingness to make some sacrifices. Credit experts suggest a few strategies that can, over time, help borrowers take control of their debts.
Developing a Repayment Strategy While Reducing Monthly Expenses
The first step in taking control of your finances is to evaluate where you are and how to reduce some expenses. Some of the steps are rather mundane and can be dealt with easily, but others require making sacrifices. Here are a few items to consider.
Cut cable or satellite TV and cell phone costs
That’s not always easy, as those companies generally require contacts that are hard to get out of. However, when the contract period is over, explore ways to cut monthly costs. Reduce the number of channels in a television package, for example, or reduce cellphone dependency. These types of cuts can be hard but will make an immediate difference.
Stop eating out as often
A recent study concluded that Millennials today spend nearly 45 percent of their food budget eating out. Current trends still show people increasing, rather than decreasing, the number of times they dine out per week. But preparing meals at home could significantly reduce overall food costs every month.
Turn down the thermostat during cold months or turn it up during hot weather
Reducing energy costs even 10 to 15 percent adds up quickly. It allows families to apply that savings to get out of debt – specifically credit card debt. If the local utility company offers free energy audits, take advantage of the service. It is a great way to reduce costs.
Put off buying that new car
While driving the newest car or truck is nice, it’s costly. Keeping an older car can mean somewhat higher repair bills. But those costs are generally dwarfed compared to new car payments. Not to mention the higher insurance costs involved when new vehicles are purchased.
Do more yourself
It’s tempting to hire a service to mow the lawn or shovel sidewalks after a snowfall. However, doing those chores yourself frees up additional cash to put to other uses.
Trim vacation expenses
Everyone needs a vacation to deal with stress and enjoy time with loved ones. However, rather than jetting off to an island paradise for two weeks, explore options that are closer to home. In addition, spend only what you can actually afford rather than adding debt by using charge cards. If you can repay the costs right away, then it pays to use cards to gain miles or other rewards. Just make sure it does not add new debt.
Get a part-time job
For some people, that’s not an option. Working even a few more hours per week can make a dramatic difference in the amount of debt that can be repaid. Every extra dollar that’s paid not only reduces outstanding balances but also reduces interest expenses.
Look for credit cards offering balance transfers and lower interest rates
If your repayment history is solid, credit card companies frequently offer deals for new customers. Take advantage of these types of offers when possible.
Credit experts have many other solutions that help borrowers develop repayment strategies. This is not just to cut their total debt loads but also to take control of their finances. The important thing is to determine what types of strategies can work for your situation. Once you have the strategy it is equally important to stick to them. There is no short-term solution for money problems, so being consistent is important.
What Happens When Debt Issues Aren’t Dealt With?
Unfortunately, far too many borrowers let things get out of hand. At least, before they take steps to deal with their financial issues. Credit ratings tend to fail if problems are not dealt with promptly. Creditors realize that borrowers are likely to have problems repaying their debts. Once that happens, the options for getting out of debt are reduced significantly.
It is true there are still options open even when debts get out of hand. However, they tend to require more significant sacrifices for borrowers and their families. In some cases, relationships flounder when money problems get too far out of control.
Well, over fifty percent of divorces are directly related to the couple’s financial issues. At least one of the partners often starts hiding money from their spouse or lying about spending – even before a divorce action is filed. Getting out of debt, on the other hand, requires couples to cooperatively work out a strategy to reduce spending and find ways to get out of debt without adding new ones.
What Happens When Emergencies Occur?
Emergencies happen regardless of how much or how little money a person has. Those situations cannot be avoided. From car problems to medical emergencies, events can place additional pressure on anyone’s finances. How those emergencies are handled, however, can reduce budget impacts.
In some cases, auto repairs can wait. When couples have more than one vehicle, they can park the broken one and get by with one vehicle. At least, until money can be saved to deal with any required repairs. If public transportation is available, take advantage of it until the vehicle is repaired.
Even the effects of medical emergencies can be mitigated in some cases. Carrying adequate insurance is always important, but copays and deductibles can still be crippling to a budget. The first step is to contact the doctor’s or hospital’s financial office. See if negotiating the amount due is possible. Ask about payment plans that can be used to more conveniently pay any bills.
Getting Started on the Road to Financial Well-Being
Everyone needs a financial plan in place to control their expenses and deal with debts. The time to start planning, regardless of your current situation, is now. Budgeting can be hard, especially for those who are living paycheck to paycheck. However, it must be done if expenses are to be controlled and debts reduced.
Making sacrifices will almost certainly be a part of developing a strategy to get out of and stay out of debt. Using credit wisely should always be a part of any financial plan. Having access to credit when it’s actually needed is important. If you’re in a situation that seems hopeless, it pays to explore credit counseling now. Even if you’re not deeply in debt, understanding how to stay out of debt in the future can make life far easier.
Yes, getting out of debt will, for most people, be difficult, but the long-term benefits make doing so worthwhile. Take that first step today. Evaluate where you are financially and develop a plan to be debt-free in the future.
Here is a video that discusses how one family tried to get out of $30,000 worth of debts in 18 months.