The U.S. economy is yet to recover from the recent recession, with unemployment still hovering around 10 percent, and yet some economists are wondering whether the fact that Americans are spending less on credit cards will harm our economy. Before you decide to prop up the economy by breaking out the credit cards, take a look at the top causes of debt and how you can avoid serious debt problems.
First, some good news: The U.S. personal savings rate, or the percentage of disposable income that Americans save, has increased over the past few years to as high as 5 percent. Yet Americans still owe $2.5 trillion in consumer debt (not counting mortgage debt). Amid this background, the top three causes of serious debt hardship are unexpected medical expenses, divorce and job loss.
- Reportedly, 79 million Americans struggle to pay medical debt. A 2009 study published in the American Journal of Medicine found that medical debt accounts for 62 percent of all personal bankruptcies.
- Debt and divorce form a cycle -- debt problems and financial issues can spur a divorce, and divorce can push couples into debt. Divorce is particularly hard financially on women. Among couples with children, 19 percent of mothers fall into poverty in the year after a divorce.
- In early 2010, 14.8 million Americans remained unemployed, and nearly a million unemployed individuals have run out of unemployment benefits. With little to no income, the risk of overwhelming debt is staggering.
Other causes of significant debt hardship can include everything from education to gambling to overspending. While gaining a college education is a valuable investment, the average graduate begins adult life with education debt of about $22,700. And The New York Times has reported that the problem gambler owed an average of $17,000 in 2004 -- on an average income of $35,000.
The facts are clear and startling. If you want to avoid serious debt hardship, take time for -- and action on -- the following:
1) Secure health insurance
Before a medical situation arises, if possible, secure health insurance. Look for the best combination of a manageable deductible, high lifetime maximum and high percentage of coverage (or low co-insurance) after deductible. If you have a high-deductible plan, work hard to save enough in an accompanying health savings account (HSA) to cover your deductible.
2) Approach higher education with a plan to limit debt
A college education is a great investment, but how you obtain it can affect your debt load. Many students cut costs by living at home while attending school. Others attend an affordable community college for two years, then transfer to a four-year institution. Still others work part-time and attend school part-time through the length of their programs.
3) Live within your means
Even if you anticipate that you will soon recover from a financial blow such as a medical incident, divorce or job loss, immediately rescale your lifestyle to live within your current means. Do not run up unnecessary debt by planning on tomorrow's income to repay it.
4) Tally debt and ask about options
If you have mounting debts, such as from a serious illness that runs up hospital bills or leaves you without income, collect all your bills to learn exactly how much you owe. Then ask each creditor about options for repayment. Some may work out payment plans with you.
5) Pay critical bills first
The key monthly payment to make is your mortgage (or rent). If you fall behind on this bill, you could lose your home. Then prioritize other secured debt, such as an auto loan, and then credit card bills and other unsecured debt.
6) Eliminate dangerous habits
If you sense you have a problem with gambling or other addictions, take a hard look in the mirror. Ask your doctor or call your state for resources to help resolve what could create a debt catastrophe.
7) Choose debt help carefully
If you are unable to resolve your situation directly with your creditors and need professional help to negotiate on your behalf, be sure you are working with a reputable debt settlement service that works as an advocate for consumers. (Some debt relief companies may receive their funding from creditors.) The obligations of each party should be clearly spelled out from the beginning, with no hidden terms or fees.
Struggling with tens of thousands of dollars of debt can be frightening and discouraging. But if you cannot manage debt or other problems on your own, consider seeking out help. Whatever means you choose to move out of debt and forward in life, know that you are not alone -- and with time and effort, the future can be brighter.
Americans owe $2.5 trillion in consumer debt, and that is not counting mortgage debt. (©iStockphoto.com/Sharon Dominick)
Andrew Housser is a co-founder and CEO of Bills.com, a free one-stop online portal where consumers can educate themselves about personal finance issues and compare financial products and services. He also is co-CEO of Freedom Financial Network, LLC providing comprehensive consumer credit advocacy and debt relief services. Housser holds a Master of Business Administration degree from Stanford University and Bachelor of Arts degree from Dartmouth College.
