According to the latest Household Debt and Credit Report from the New York Federal Reserve, America's total household debt has surpassed $13.5 trillion. Do you sometimes feel like $13 trillion of that debt is yours?
Based on a recent survey by LightStream, almost one-quarter (23%) of Americans believe that it's nearly impossible to climb out of significant debt once you acquire it. The sense of hopelessness can lead to bad decisions and a treadmill of running debt. In that harmful mindset, $13,000 might as well be $13 trillion – you'll never pay it off anyway.
Don't let despair blind you from alternatives. According to LightStream senior vice president Todd Nelson, "People who are carrying debt often overlook cost-reducing solutions." Nelson adds that debt consolidation can be a smart strategy that can benefit Generation Xers (ages 36-51) with good credit.
Why does Nelson highlight Generation Xers? LightStream found that while large majorities of adult generations carry debt, Generation X has the largest percentage of debtors at 80%. They also have the highest non-mortgage debt of all generations ($30,334, according to Experian data), and 25% of Generation Xers aren't confident in the way they currently manage debt.
Debt should be attacked in two ways. Control spending to prevent new debt, and search for better interest rate options on existing debts.
A solid and realistic budget is crucial to success. To pay down debt, you must have a monthly surplus. Lay out all your expenses, including annual expenses like taxes and renewal subscriptions. Throw in extra expenses for contingencies.
Compare that to your income and cut expenses until you reach a surplus. It doesn't have to be a big surplus to build positive momentum. Think long term if that helps – 29% of respondents in the LightStream survey said they would be willing to give up vacations for the next five years if they could pay off their current debt with the savings.
With a budget in hand, address interest charges. How many different debts do you have, and what annual percentage rates (APRs) do they charge? Choose a strategy that fits your situation. Debt consolidation works when you can find a lower interest rate or better payment options.
LightStream debt consolidation loans offer a set payment plan and lower interest rates than credit cards – although the difference depends on your creditworthiness. To judge the offer, use an online calculator to compare the interest rate savings to the fees associated with the loan. More than 4 in 5 Americans surveyed (84%) believe there are benefits to a debt consolidation loan.
Balance transfer credit cards allow you to consolidate existing credit card debt onto a new card, typically with an introductory 0% APR and limited or no balance transfer fees. However, the interest rates will be high once the introductory period expires – so it's critical to get spending under control and pay down debts quickly.
If you can't find a good consolidation deal, choose an improved debt payment strategy. Pay the minimum on lower interest debts and apply extra funds to paying off high-interest debt or focus on paying off the smallest debt first. Once you've reduced debt and shown greater fiscal responsibility over time, your credit score should improve. You'll be eligible for better interest rate offers, making debt consolidation viable.
Debt consolidation can save you significant money – if accompanied by proper spending control. Without a proper budget, debt consolidation becomes an excuse to spend more money. In that case, you truly never will escape significant debt because you perpetually overspend.
There really is a difference between $13,000 and $13 trillion in debt. Don't try to explore the difference the hard way.
If you want to consolidate your debt, join MoneyTips.
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