One common problem which inflicts a vast majority of the people irrespective of caste, creed or nationality is the debt burden. While developing countries feel the heat arising out of poverty, affluent nations face it out of consumerism. The aftermath of this burden manifests itself in varying consequences, from suicides to bankruptcy. It destroys domestic peace, results in divorces and in a nutshell makes living nightmarish.
If one were to think of a nation which constantly discounts its future income to present consumption, it is U.S.A. According to Federal Reserve, Americans have accumulated a whopping $ 1 Trillion in revolving credit.
The highest incidence of an unsecured debt in U.S. is in the form of credit card payables. It is reported a typical American carries $9000 balance on his credit on a month to month basis. In a situation where the card balances carry an interest rate of 18% per annum, even assuming that the card holder does not avail any further credit, his revolving the payment at about 2% of the balance per month, would take him (hold your breadth) a 47 years to pay it off. Thus on a $9000 loan, he/she would have paid $32994 in which the interest factor alone would be $23994.
Then how does one get out of debt? The National Foundation of Credit Counseling which has furnished the above data has chartered out a 12 step program for the debtors to come out of this vicious cycle.
We would not verbatically deal with all the 12 steps, but only present the essence of them. Persons needing help can contact this non-profit credit counseling agencies which are situated in all 50 States, besides Washington D.C. and Pureto Rico.
The first and foremost of these steps is to admit one’s problem of indebtedness. Many people do not openly admit this as they think it is a form of self-denial. The next step is to take a realistic view of your income and expenditure. After objectively analyzing the expenditure, the essential and non-essential should be separated out and wasteful expenditure should be cut. If still the essential expenditure outstrips the income-levels, the next step would be to seek measures for enhancing one’s income. If this involves taking up a second job, however hard it is, it should be resorted to, as it is less harder than living with debts.
When it comes to the question of paying your debts, the advice is to start from the ones which carries the highest rate of interest and work your way down wards. When several debts compete with each other, one should resort to paying manageable ones even if that does not mean paying off the ones with higher interest rate. This is because of the psychological feeling of accomplishment one may get from paying such a debt.
It is not a good idea to pay off an unsecured debt by availing a secured debt. Many Americans were lured into committing this mistake during the housing booms, when they took home equity loans to pay off high cost credit card loans. Prima facie this may sound to be a logical step as interest rates in a mortgage loan is lower when compared with a credit card loan, but by doing so, they have fallen into a further debt trap. This is because the credit card companies trap them into further loans by making lucrative offers. When they fall into this trap, they end up having both secured and unsecured loans.
Finally, one should know the importance of credit scores. The higher ones credit scores, the lower the debt burden, because of lower interest rates, but to get a higher credit score, your debts should be in manageable levels as payment track record is the key indicator for obtaining higher credit scores. In effect, living within one’s means is the only permanent solution for getting out a debt-trap and its consequences.