Personal Finance: Debt bomb still ticking for many Americans

Personal Finance: Debt bomb still ticking for many Americans

March 28th, 2013 By Chris Hopkins in Business Diary

Chris Hopkins

Photo by Contributed Photo/Times Free Press.

Great news: the share of U.S. households carrying some form of debt declined over the past decade, from 74 percent in 2000 to 69 percent in 2011.

Not so great news: those who do carry debt have loaded up even more on it. The U.S. Census Bureau has released an analysis of trends in household borrowing patterns over the period 2000 through 2011, and the results are sobering. The median debt for U.S. households increased by 37 percent, from $51,000 to $70,000 in constant 2011 dollars (that is, adjusted for inflation).

To make matters worse, another recent study by the Census Bureau revealed a gloomy picture of family wealth. Over the same period, median household net worth declined nearly 16 percent to around $69,000 in constant 2011 terms, thanks in part to two bear markets and a meltdown in real estate. Ouch.

On a percentage basis, older Americans actually experienced the largest increase in their indebtedness. Median debt for those over 65 more than doubled, while the percentage of older households carrying debt increased as well, the result no doubt of dented retirement savings and investments.

While mortgage obligations dominate the liabilities of older households, credit card debt remains a pervasive problem with younger borrowers. Financial data website Bankrate.com reports that that only slightly more than half of Americans have more in emergency savings than they carry in credit card balances.

Add to that the latest and potentially most devastating trend in runaway borrowing: student loans. With outstanding balances approaching $1 trillion and now exceeding credit card debt, college loans are quickly emerging as an epic millstone around the necks of a whole generation of new graduates, not to mention the significant cohort of former student who did not complete a degree but are nevertheless responsible for paying off the loans they received.

Despite all the talk of "deleveraging" that has occurred since the financial crisis, the encouraging reduction in total household debt obligations since 2009 is just a start. Much more must be done.

No matter how suffocating the debt may seem, extrication begins with a single action. Once you have resolved to begin the process, choose a small step and then take it. That might mean singling out one relatively small account and working relentlessly to pay it down. Track the balance of that debt each month in order to give yourself positive feedback and maintain momentum. Once it is extinguished, pick another target and bore in.

If you have not already done so, take another look at your mortgage. Home loan rates will never be this low again, so if at all possible refinance into a lower fixed-rate loan before the party ends. If you are underwater, explore the options available through the mortgage modification program administered by the U.S. Government (www.MakingHomeAffordable.gov). The program has been refined and is significantly more effective than its predecessors.

Most importantly, make the commitment to reduce your debt and then take the first step.

Christopher A. Hopkins CFA, is a vice president at Barnett & Co.