How to Effectively Manage Household Debt

According to credit reporting company Experian, the average household income in the United States was $79,834 in 2019. 

The good news is that this is up from $77,762 in 2018, a gain of $2,072 (2.7%). However, the bad news is that household debt is rising just as fast as household income. 

As one of the three major credit bureaus that tracks American consumers’ financial information, Experian has firsthand insights into how much we owe. In the company’s 2019 Consumer Credit Review, it revealed the average balance Americans owe on each major type of debt and how it has changed over the past year. 

If we view six categories of household debt, the average balance for each has increased as follows;

  1. Credit card – 3% and note that 67% of consumers have at least one credit card
  2. Retail card – 3% and note that 62% of consumers have at least one retail card
  3. Student Loan – 6% and note that 17% of consumers have at least one student loan
  4. Mortgage loan – 1% and the good news here as delinquencies have declined since 2010
  5. Auto loan – 2% and note that 30% of consumers have at least one auto loan
  6. Personal loan – 1% however, this is the fastest growing debt category

While debt is unavoidable for most if not all consumers, it must be managed. The issue for the average household is that we do a very poor job of it. There are virtually no courses being offered to young adults on the topic of budgeting or borrowing. Also, oftentimes parents do not involve their kids in household budgeting or in budget related decisions. Therefore, as adults we are typically self-taught.

The question is nots not how to ‘get out of debt’ which we will review at a later date, but more so how to effectively manage your finances so that you do not incur more debt than you can comfortably manage

Household Debt Management Checklist

  1. Assess who and how much you owe to each creditor (mortgage/rent, auto, cable, utilities, etc). Make a list of your debts, including the creditor, total amount of the debt, monthly payment, and due date. You can use your credit report as needed to confirm the debts on your list. Don’t just create your list and forget about it. Refer to your debt list periodically, especially as you pay bills. Update your list every month as the amount of your debt changes.
  • Pay Your Bills on Time Each Month. Late payments make it harder to pay off your debt since you’ll have to pay a late fee for every payment you miss. If you miss two payments in a row and your interest rate and finance charges will increase.

How to Effectively Manage Household Debt – by Joel Bernheim

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  • Use your computer or smartphone to record your payments there and set reminder alerts for several days before each payment is due. If you miss a payment, don’t wait until the next due date to send your payment, by then it could be reported to a credit bureau. Instead, send your payment as soon as you remember to.
  • Create a Monthly Bill Payment Calendar. Use a bill payment calendar to help you figure out which bills to pay with which paycheck. On your calendar, write each bill’s payment amount next to the due date. Then, fill in the date of each paycheck. If you get paid on the same days every month, like the 1st and 15th, you can use the same calendar from month to month. But, if your paychecks fall on different days of the month, it would help to create a new calendar for each month.
  • Make at Least the Minimum Payment.  If you can’t afford to pay anything more, at least make the minimum payment. Of course, the minimum payment doesn’t help you make real progress in paying off your debt. This keeps your debt from growing and keeps your account in good standing. When you miss payments, it gets harder to catch up and eventually your accounts could go into default.
  • Decide which debt to pay off first by selecting the highest interest rate bearing debt. Paying off credit card debt first is often the best strategy because credit cards have higher interest rates than other debts. Of all your credit cards, the one with the highest interest rate usually gets priority on repayment because it’s costing the most money.

If you follow these simple steps, then I assure you that your finances will not fall into disarray. However, if your expenses already exceed your income, then I will attempt to articulate in my next white paper the steps that you may wish to take in an effort to re-balance your debt to income ratio.

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