Americans are notorious for> their ability to spend more than they earn. But now -- as the credit crunch continues to cripple the economy -- that notoriety has reached epic proportions.
According to the Federal Reserve, total consumer revolving credit, including credit-card debt, stood at nearly $974 billion last November, up from some $770 billion in 2003. Meanwhile, a January 2009 report by the American Bankers Association found that bank-issued credit-card delinquencies hit their highest level in five years during the second quarter of 2008. And consumer bankruptcy filings increased by nearly 33% in 2008, according to the American Bankruptcy Institute and the National Bankruptcy Research Center.
"We're in a different time than we've been in any of our living memories," says Gerri Detweiler, credit advisor for Credit.com. "The level of debt that consumers owe is much higher than it's been in the past, and there's this big gap in [debt] solutions."
Fortunately, the first steps toward a debt-free life are some of the easiest. Cut down on discretionary expenses such as dining out or shopping. Then create a budget and stick to it. Another helpful move: asking lenders if they can offer better terms on rates or minimum payments.
Here are four more ways to help you reduce commonly-held debt.
If your mortgage payment is getting hard to afford, contact your lender to see if you can negotiate a better rate or lower monthly payments. If you're in real dire straits, see if your lender is participating in Hope for Homeowners, a government-run program that encourages lenders to refinance mortgages of borrowers who are at risk of losing their homes. More than 200 lenders have signed up since the program began on Oct. 1, according to the Department of Housing and Urban Development (HUD).
Also see our tips on renegotiating your mortgage.
Interest rates on credit cards can run as high as 33% for cardholders who are late with a payment or have a low credit score, says Curtis Arnold, founder of CardRatings.com.
To tackle this debt, pay more than the monthly minimum requirement and focus on paying off high-interest-rate cards first, says Sheryl Garrett, a fee-only certified financial planner.
Another way to rein in costs: Take advantage of 0% balance transfer offers or low introductory APRs. Just be sure to read the fine print. Currently, the average fee for a balance transfer is 3% or 4% of the transfer amount which can equal up to $120, says Arnold. (Some lenders don t even have caps.) Also, make sure you can pay off the balance before the introductory period expires and the high rates kick back in.
Private Student Loans
According to the College Board, the average undergraduate student left school with more than $12,000 in debt during the 2006-07 academic year.
Just like credit-card debt, it's best to tackle higher-interest loans, namely federal student loans issued before July 2006 and most private student loans, first. Both carry variable interest rates that can rise and fall each month. Last year, rates on private loans, for example, averaged 14%, says Mark Kantrowitz, founder of FinAid.org.
One solution is to consolidate all your private loans. However, since consolidation loans currently carry variable interest rates it would only make sense to do so if you have a good credit score. Otherwise, you could get hit with an even higher rate. One problem with these consolidation loans: They're hard to find. Currently, only four lenders -- including Wells Fargo and Student Loan Network -- offer them.
If you're drowning in medical debt, make sure your insurer is paying its share of expenses. Often times, the doctor will use a certain code for the services rendered that the insurance company can't identify, says Garrett. Instead of rectifying the issue, the insurer just doesn't pay."These mistakes happen way [too] often," she says.
Next, speak with your medical provider. To ensure they get paid, medical providers are often open to working out payment plans. Before speaking with your provider, figure out how much you can afford to pay each month, then pitch that amount to the doctor's billing department, says Garrett. In addition, many hospitals have government funds to help patients who can't afford their medical care, and independent nonprofits also provide financial assistance.
See our story for more tips on digging out of medical debt.