At the start of the year, U.S. household debt reached a record high of $17.3 trillion, according to data from the Federal Reserve Bank of New York (NYFRB). Overall, U.S. household debt increased in 2023, with credit card debt at the highest increase of 16.6%. On active credit card accounts a balance was carried on 56%, according to the most recent available data from the American Bankers Association. Credit card debt is not good debt if you don’t pay it off in full every month. Carrying credit card debt is expensive, interest rates of 22%‐30% are common and it makes borrowing for good things, i.e. a mortgage, more difficult and probably more expensive.
So, what is good debt? Good debt is borrowing in order to enhance your future net worth or personal prospects.
- You might put a home mortgage in this category, since over time homes tend to appreciate in value, and in the meantime, you have a place to live.
- Borrowing to pay for higher education might also be considered good debt, but there’s a fine line there. If the degree you’re financing doesn’t lead to a job that will generate enough income to pay the interest and principal on the student loan, then the debt moves into the ‘bad’ range.
- Small business loans, if the money is used wisely, can be considered good debt; the firm will add staff, or a marketing budget, or otherwise use the loan proceeds to raise the value of the company. Of course, is the money is not deployed wisely, or if the projects invested in don’t bear fruit, then we can retroactively say it was bad debt. Almost a third of small businesses fail to survive their first two years, so startup money is more likely than not to eventually fall into the bad debt category.
There are many other examples of bad debt, but they tend to fall into a few categories.
- Credit card debt is in general bad debt. Credit card balances should be paid off every month, and if you cannot you are spending more than your income.
- Buying items that you don’t need (think: an 80‐inch TV, or a very expensive automobile that also happens to be a gas guzzler) immediately fall into the bad debt category; if you really want or need those things, it’s better to save for them and avoid the interest rate charges.
- Second homes with a mortgage can be also problematic, as they not only put you in debt, but also incur annual maintenance costs.
How do you know when you have too much debt? The Debt.org website suggests that if your monthly debt payments come to more than 43% of your monthly income, then it becomes a red flag to potential lenders. For instance, you probably won’t be able to get a mortgage if your ratio exceeds that amount. But who wants to pay more than 40% of income to debt payments; if you are in that range it’s time to do something about it!
Here are some strategies; not easy, but doable and it takes focused work to reduce your debt.
Assess the situation: Know every dollar and cent like the back of your hand. Take your head out of the sand. Reduce your wants and only pay for things you really need.
Budget ruthlessly: Cut costs like there’s no tomorrow. If it’s not essential, it’s gone.
Pay down the highest‐interest debt first: Target your highest‐interest debt first, then deal with the lower interest debt.
Negotiate your rates: Pick up the phone. Lower interest rates are like finding a shortcut. Not every creditor will negotiate, but you have nothing to lose. Worst case, you’re back where you started.
Find extra income: Think side jobs. They’re your secret weapon to throw extra cash at the debt.
Build an emergency fund: an important strategy to create a safety net, to keep a small stash for ‘just in case’. Be ruthless about putting money away, no matter how small the amount.
Avoid new debt: Don’t close your credit cards, that will hurt your credit score. Put them away. Best is to put them in the freezer in water, so you can’t use them anytime fast.
Seek professional help: If it’s too much, use a debt counseling service. They can often negotiate better than you because they know the collectors since they work with them daily. One of such services is GreenPath Financial Wellness/Debt Counseling Services. https://www.greenpath.com/
Stay motivated: Remember, it’s a journey. Keep your eyes on the prize: a debt‐free life. Take your eye off your credit score. Take your eye off anything but your balances.
Stop shaming yourself: Stuff happens. Life happens. Don’t blame or shame yourself. Get up, dust off, and move on. Forward is the way out. Don’t get stuck in the past.
Call us. We can help you get your debt in order and start on the path to savings.
