Debt: It’s a tool that allows us to buy a home, invest in a business, buy a car and make necessary purchases.
But it can also be a trap that tempts us to sample the good life on credit. If we’re not careful, we’re soon in over our heads.
These days, Americans are splurging on debt at a rate that even surpasses the early 2000s when consumers were showered with almost unlimited credit offers. At the current pace, consumer debt is projected to reach a record $4 trillion by the end of the year, according to Lending Tree, which analyzed data from the Federal Reserve.
Experts calculate that Americans now owe 26 percent of their annual income to debt, up from 22 percent in 2010.
Of course, debt isn’t all bad. If it weren’t for the opportunity to take out a mortgage or commercial loan, few Americans would be able to buy a house and would be forever riding the bus to work.
But in the extreme, going into debt can lead to misery. And when an entire society goes off the deep end, it can help trigger a major recession.
A 2014 book by Princeton University Professor Atif Mian and the University of Chicago’s Amir Sufi argues that unmanageable household debt, even more than bank failures, helped bring down the economy in the Great Recession of 2007.
“House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening Again” essentially argues that Americans were so overburdened by mortgage debt that they drastically cut spending, eventually leading to the stock market crisis, skyrocketing bankruptcies and millions of foreclosures.
Some blame Americans’ affection for the buy-now-pay-later lifestyle with little regard for the hazards it poses. Too many consumers, they argue, enter the consumer marketplace as adults without any real knowledge of credit and how to manage it.
Chris Barrows, 32, is a homeowner, father of three and a responsible career guy who pays off his credit cards on time.
But like many Americans, he learned about credit the hard way.
“I got my first credit card at 18,” he said. “I’d like to say I learned something, but I really didn’t.”
The Mansfield resident, who works in his family’s insurance business, racked up charges at a consumer electronics store that eventually went into collection.
“That followed me around for a long time,” said Barrows, who reformed his spending and now has a 700-plus credit rating.
He says young Americans typically enter the consumer mainstream with little understanding of credit, interest rates or financial discipline.
“Kids think it’s like free money,” he said. “It’s something I’m not sure if they teach in schools. But it’s not getting through to kids.”
Diana Bowler, 29, who works in the same office, is single and doesn’t have the complications of home ownership or a large family. But she still subjects herself to a form of credit: “tough love.”
“I don’t have any credit cards,” Bowler said.
She got one when she was 18, she said, but found the lure of spend-now-pay-later all too tempting.
Now Bowler, who has to think of other monthly obligations in the form of rent and student loans, says she can do without a credit card bill.
“Credit cards can be habit forming,” she said.
Just the same debt, particularly college loans, has become an outsize burden for many millennials seeking to start careers and buy first homes, said Candace Sallale, a financial adviser with an office in Plainville.
In some cases, young people are starting careers carrying $100,000 or more in loan obligations.
“That kind of debt holds up a lot of things,” Sallale said.
Starting families and home buying often take a back seat to paying off loans.
“You see a lot of millenials living at home with their parents today out of necessity,” she said.
If a graduate’s college degree isn’t one that guarantees early employment in a highly paid profession, the burden of those payments can linger for years, she said.
Some young consumers are fortunate to be able to rely on a strong core of self-discipline.
Katie Darling of Attleboro, a single mother of two, said she has two credit cards but pays them regularly and restricts her spending.
“One card I call my emergency card, which is only for gas or things that come up,” Darling, 32, said. “The other is my ‘kids card’ for when my boys need a new shirt or socks, summer camp and other things.”
Darling said she has a sort of alarm bell that goes off if she thinks she’s charging too much.
“If I get my balance up too high, I get nervous,” she said.
Kostas Loukos, 19, a college student from Mansfield, says he’s prone to be cautious, too.
“My dad always told me not to take out my card for frivolous things,” Loukos said, adding that he usually uses credit to pay for gas, but pays it off right away.
His advice to people his age: Be conservative with your spending.
“Use a credit card as little as possible, then pay if off as soon as possible,” he said. “That way you build good credit.”
Older Americans, many of whom are children of parents who lived through the Great Depression, often say they are more thrifty and conservative about their use of credit than younger consumers.
Steve Scheidel of North Attleboro, 68, a semi-retired businessman, did a lot of the work on he and his wife’s manufactured home to save money. And they’re careful to keep their charge cards up to date.
“I don’t think a lot of younger people always think about the bill that’s coming due,” Scheidel said. “Obligations can easily get out of hand.”
One simple rule, he said, is to carefully budget payments for any purchase equal to 15 percent or more of your monthly income to make sure you won’t be left strapped.
Sometimes older workers preparing for retirement face other kinds of dilemmas, Sallale said.
Many of her clients are such workers whose children have left and are well established with few obvious credit problems.
But some soon-to-be retirees aspire to luxury “forever homes” located on the water or in resort communities. Those purchases often come with big price tags and mortgages to match.
“Now you might have a $700,000 home but only 15 years left to work,” she said.
The question becomes, how much debt is prudent to take on without crushing payments lingering into retirement years?
For all too many consumers, unwise use of credit or life events like divorce or unemployment can cause obligations to pile up beyond reasonable hopes of timely repayment. And high interest rates on most commercial credit cards don’t help.
Sallale said a few strategies can help when debt threatens to overwhelm:
- Using zero-interest credit cards that require prompt repayment eliminates interest and keep users from getting too far in debt.
- In cases where high-interest debt has accumulated beyond manageability, a bill consolidation loan through a conventional lender may reduce interest costs and speed repayment.
Budgeting and other no-nonsense financial tools can help avoid getting in over your head with credit cards and other obligations, said Mark Higgins of American Credit Counseling Service. The nonprofit agency provides financial education and helps administer a program that can help some individuals qualify for reduced interest on their credit card payments.
“In the past year, we’ve seen a definite uptick in credit card debt-related problems,” Higgins said.
He attributed Americans’ taking on increasing amounts of debt to factors like student loan payments and mortgages taking up a bigger slice of incomes.
“Student loans now account for more total debt than mortgages,” Higgins said.
That makes it tough for recent college grads, particularly those facing delays in getting a good job in their fields, to keep up with daily expenses.
Seniors on limited incomes are also victims of credit card problems, often because they sometimes use cards to supplement an insufficient income flow from their Social Security payments.
Higgins said he’s seen multiple examples of graduates needing to pay off six figures in college debts.
But people young and old are also succumbing to advertising promising the greatest and the best new products that for some blur the line between “like to have” and “need to have.”
“It used to be that advertisers appealed to customers in newspaper and TV and radio ads,” he said. “Now people are being bombarded all the time by commercial messages in social media on cable and on their phones.”
Those messages provide a lot of temptation. And the price can be heavy.
It’s far easier to get into debt than to climb out from under a mountain of credit card payments, Higgins said, making planning an increasingly important tool in building and keeping good credit.
“In most cases where people get into trouble, it’s because of lack of a budget,” he said.
Budgeting, creating a plan to balance monthly expenses against income, helps consumers plan their spending and put a lid on break-the-bank credit purchases.
For many people, though, debt can easily get out of hand.
For the most serious cases, ACCS administers a debt management program on behalf of various credit card companies that allows customers who qualify to reduce payments and lower the interest rates on their balances.
A major pitfall exists among the many groups advertising that they can settle all of a customer’s credit problems for a monthly fee over a set period of time.
Such “debt settlement” arrangements rely not on paying back creditors, Higgins said, but allowing balances to go to collection to eventually be written off by lenders.
Many users assume that by signing up, they’ll avoid dunning by credit card companies and have an easier time repairing their credit. Just the opposite is true, he said.
“We’ve had people come in who are confused because they signed up for a program and they’re still getting demands for payment,” he said. “Then we have to explain what they’ve gotten themselves into.”
Far from helping to repair a customer’s credit, such debt settlement programs ruin it, Higgins said. Usually, the damage isn’t repairable.
“Once you’re five or six months into a program, the damage is already done,” he said.