America may be in a continued economic recovery, but that recovery is not currently translating into more consumers paying their debts on time. At least that is the case with respect to auto loans and credit card debt in the third quarter of 2016, according to the American Bankers Association (ABA).
The ABA tracks delinquency rates on different categories of loans and releases the information in their Consumer Credit Delinquency Bulletin. For ABA purposes, delinquent accounts are those with payments that are overdue by at least 30 days.
The recent ABA report showed that credit card delinquencies increased to 2.74% of all accounts and that auto loan delinquencies increased to 0.87% of all accounts — not a huge increase but worrisome all the same. Access to credit is beginning to loosen, and the majority of newer credit card customers are falling into the subprime category.
It's likely that subprime borrowers will struggle more to keep up with existing debt payments and be tempted to rack up even further debt simply because the credit is available. When you are accumulating new debt, it becomes extremely difficult to address the delinquent debt that you already have. Your credit score will suffer as a result of the increased likelihood that you will not pay back your creditors. Check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips.
If you do have credit delinquencies, it is important to get them paid, even though the effect on your credit report is not immediate. Rod Griffin, Director of Public Education for the credit bureau Experian, elaborates on delinquencies: "Credit reports are credit history, so it's going to stay on that report from the original delinquency date. If you pay that collection account or pay off a debt...it's still going to help scores in the long term; it's going to help you recover a little more quickly...bring the account current if you can."
The best method for dealing with excessive debt is to prevent it from occurring in the first place. If you have been denied credit or had limited credit for years, and now have increased credit accessible to you, it is going to be difficult to control spending — but it is essential that you do so.
Start by setting a realistic budget and sticking to it. Make sure to include non-monthly expenses like property taxes and insurance premiums in your calculations.
Once you fully outline all your income and expenses, look at where you can cut back to devote more funds to paying down debts, or to making it less likely that you will add to your overall debt. Resist the urge to give in to impulse purchases, but be sure to leave yourself a small amount of discretionary funds to use as you please. Otherwise, you are more likely to get discouraged and give up on your budgetary plans.
With extra savings to add toward paying down debt, prioritize your delinquent bills first to bring your accounts back into good standing. After that, either address the debt with the highest interest rate first (to save on interest) or eliminate the smallest debts first (to gain positive momentum) — but make sure that you apply at least the minimum payments on all debts. Don't eliminate one delinquency just to start another.
With planning and effort, you can get in the habit of not spending more than you can pay off each month and have leftover funds to pay down your delinquencies. It's not an easy task, but it's a worthwhile one.
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