Right up until coronavirus gave the American economy an acute case of double pneumonia, the U.S. economy was on a multi-year tear. Jobs and wages up, unemployment down, the stock market shattering records, sending retirement accounts soaring.
Another record accompanied all this good news, and it’s one that ought to give everyone pause: At the end of 2019, American household debt topped $14 trillion — with a T — for the first time.
Household debt surged by $601 billion in all of 2019, the lion’s share in mortgages. However, according to the Federal Reserve Bank of New York, credit card debt also soared to a record high, hitting $930 billion, rising $46 billion in the fourth quarter.
Should we worry? That depends. Pre-COVID-19, most of us were in better position to manage our debts than we were the last time credit balances spiked — in 2007, just before the Great Recession. But well before the Great Quarantine of 2020, delinquencies were on the rise (to 5.32% from 5.16% in 2019’s third quarter). Burrow in and you discover young borrowers (18-29) had a delinquency rate of 9.36%, 76% higher than overall delinquencies.
Statistics are just that. Debt trouble visits every age group, for any number of reasons. And there are traditional measuring sticks to help consumers decide if they’re in, or nearing, trouble.
One of the key indicators is your debt-to-income ratio: Add your monthly debt payments (credit cards, car and/or personal loans, mortgage or rent), then divide the total by your monthly gross income. Multiply by 100 and, voila, there’s your DTI percentage.
Traditionally, a DTI up to 28% is considered healthy. But if your DTI includes making no more than minimum payments against your credit card debt, you don’t need us to tell you there’s a problem.
Warning Signs You Have a Debt Problem
So, if a 28% DTI is not necessarily the platinum standard, how do you know you have a debt problem? It could be as simple as applying the venerable psychologist’s maxim: If you think you have a problem, you do.
Let’s dive in.
The foundation of every financial strategy is to calculate a budget. The success of that strategy depends on how well you stick with it. The fastest way to money misery is persistently having more going out than coming in.
Being able to calculate, then manage a budget are two essential keys to successful adulting. Programs and apps abound to help make the task manageable, but the bottom line is, the end of the month need to get here before the end of the money.
If it’s the other way around, you need to find ways to trim your spending or increase your income — or both, until your budget (with provisions for saving and building an emergency fund) balances.
If you can’t create a budget that balances and is realistic, you might have a debt problem.
Lenders, including credit card companies, are in the business of getting paid back. Too much debt can scare off potential lenders who doubt your ability to pay them back, triggering credit denials. A low credit score — along with a credit report filled with late or missed payments — can also cause you to be denied credit.
If you’ve been turned down for new credit or higher balance limits on existing cards, you may have a debt problem.
Once in a great while straying over your balance limit happens to the best of us. Having one or more cards consistently maxed out or over the limit is a certain sign of debt management trouble.
Card companies attempt to get our attention by hitting us with over-the-limit fees, an early warning system that we need to control our spending appetites. Suffering over-the-limit charges frequently, especially on more than one card, is a sign you may have a debt problem.