Debt is one four-letter word with a lot of stress attached — especially when it comes after the words “credit card,” “high-interest-rate” or “student loan.” And if it seems to be affecting more people every day, you're not imagining it.
U.S. credit card debt is on track to reach $1 trillion this year, nearing the record high of $1.02 trillion set in January 2008, right before the financial crisis.
Is it time to worry? Perhaps. The growth of consumer debt to levels we haven't seen in years is as a sign that people are more comfortable carrying debt (i.e. spending money they don't have) and that memories of the crisis have faded into the background. More consumer debt also opens the door to potential mistakes when it comes to credit utilization ratios, late payments and delinquency. In short: Debt can be a savings killer.
“It ends up crippling people on being able to achieve their financial goals small or large,” says Jesse Mecham, founder of YouNeedABudget.com.
So how do you know if you have too much debt?
“Too much is relative to how much you make,” says Rod Ebrahimi, co-founder of Ready for Zero, which offers planning tools for debt repayment.
He advises being careful of consistently supplementing an income with a credit card. He’s right. If I could give one piece of advice to anyone looking to take charge of his or her financial future, it would be to live below your means — period.
That's why it's especially important to pay attention to your debt levels from month to month and year to year.
“Are you paying it down or is it increasing?” asks Kelly Graves, certified financial planner at Carroll Financial Associates. “If you’re adding to your debt every single month or just from quarter to quarter, you’re living above your means, and there’s a problem here.”
(One way to enable yourself to toe this line is to keep housing payments, whether rent or mortgage, at or less than 30 percent of your income, he suggests.)
Feel like you might be drowning in debt or just want to take a more practical approach to paying it off? Here's what you need to do:
Know what you owe
Sit down and make a list of every single debt you have, what the interest rate is and what the minimum monthly payment is. It can be hard to face and easy to put off, but the best way to move forward is getting everything out in the open — and getting organized. Consider setting calendar reminders for each payment, too. After you’ve done that…
Rank your debts from highest to lowest interest rate
“Identify the most painful debt first,” says Mecham.
Rank them from highest to lowest interest rate so you know where you stand, and find a repayment strategy that works for you. Some people swear by paying off the smallest balances first to stay motivated, but Mecham suggests tackling the highest-interest-rate debt first and foremost to save maximum money. It’ll likely be a credit card, so while repaying it, don’t use it — put that card away and keep it out of sight. Other tips? Call the credit card company to ask if you qualify for a lower interest rate, especially if yours is above 15 or 16 percent.
Give yourself a little breathing room
After beginning paying down debt, it’s common to feel excited, like you’re on a roll. But if you’re not careful, “one little hiccup can really kind of derail things,” says Mecham.
He suggests sitting down and being honest about what you really care about. If being debt-free is important to you (and it likely should be), make sure to still set aside some money for the other top priorities in your life (maybe holiday gifts, a modest vacation or even a life insurance premium). You could even figure out how to make some of your top priorities less expensive and put that money towards debt.
Mecham’s example? A family whose tradition it is to go to the movies every Friday. If they think critically about why they love going to the movies, the real reason could be that they value spending time together. Movie nights at home could be much less expensive (maybe the popcorn will be better, too).
--- with Hayden Field