America’s Debt Hits The Ceiling. How’s Yours Doing?

August 4th, 2011

How is your debt on a scale of 1 to 10?

The Bank of Montreal has issued five tips on how individuals can avoid hitting their own personal debt ceilings. Like Washington, many of us live beyond our means, with a quarter of us living paycheck to paycheck – a 10% increase over last year. The average household carries $75,600 in debt and 44 million souls rely on food stamps.

Don’t overspend and curb credit card debt.

These are obviously related. Overspending increases debt. It’s taken Uncle Sam decades of profligate spending to reach this crisis, but the average citizen can get deep into credit card trouble far more quickly.

Credit card limits

Individuals who hit their credit card limits should take it as a sign that their spending is out of control and start cutting back. Or they can raise revenues by getting a raise, finding a better paying job, moonlighting or running a business on the side. Maintaining or increasing spending without boosting your income means trouble. Too often, indebted consumers ask their financial institution to raise the limit on their credit card. The request is often granted because that’s how the banks make their money.

Financial destruction

But even if your card issuer refuses to raise your limit, debtors hellbent on financial destruction may apply for second and third cards, bypassing the safety mechanism of hitting the limit on the first card. Problems snowball if you pay only the suggested monthly minimum payment. The power of compound interest goes into reverse and you get in over your head, drowning quickly if unexpected job loss curtails your ability to meet even the seemingly low monthly minimums.

Mortgage free

Another tip is to become mortgage-free faster. This tip comes after curbing credit card debt, since mortgage interest is much lower than that charged by most credit cards. Credit card debt is considered bad debt because it involves spending on consumption. Mortgage debt is good debt because it helps you build equity while putting a roof over your head, and is tax-deductible.

Monthly payments

If the mortgage is large and monthly payments small, you pay more in interest than the house cost, meaning your effective home price is double or triple the asking price. The best mortgage is no mortgage at all and the way to eliminate one is to have high regular payments that reduce significant amounts of principal from day one. Take advantage of annual prepayment privileges and you’ll be amazed how fast your personal debt ceiling fades into irrelevancy. Once credit card and mortgage debt are eliminated, along with student loans and car loans, focus on becoming the beneficiary of compound interest instead of its victim.

Invest to save

BMO’s fourth tip is invest to save, ideally through tax-free savings accounts.

Plan B

The last tip is to have a Plan B. Unfortunately, too often the B stands for bankruptcy. This is invariably a disaster for consumers and as the world almost discovered the past week, a disaster for everyone if the government of the world’s largest economy goes bankrupt.

This entry was posted on Thursday, August 4th, 2011 at 4:22 am and is filed under Business, Economy, Finance, Money, Personal / Internet. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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