At the staggering amount of $4 Trillion dollars, consumer debt is now at it’s highest point in U.S. history. What’s more, as of the latest report from the Federal Reserve, it’s growing at an alarming rate of 7% per year.
If you have outstanding debt, what these numbers suggest is that you’re not alone.
And to be fair, credit is not necessarily a bad thing. In fact, if leveraged correctly, it can actually be a huge benefit: Cash-back rewards, travel miles, hotel upgrades, etc.
But if not properly managed, you can quickly find yourself on the other end of the spectrum and way over your head.
This is because it’s easy to justify almost any purchase when you’re buying it with credit.
“It’s $300 and I just have to have it.”
“I’ll pay it off when I get my next check.”
“I can finance it for 6 months, no interest.”
Rinse and repeat this thought process a few times and quickly you’ll realize that you can’t pay the full credit card balance when the bill is due. The credit card companies are counting on it, otherwise they don’t make any money.
Now in addition to your mortgage, your auto loan payment, your student loans, insurance, and the necessary living expenses like food and groceries, you also have a credit card payment you need to make.
The problem is, now you have less cash to use to afford other things which you may want to buy because the money you could be using to buy it is already being used to pay for the debt that you currently owe.
The fix? The next time you see that fancy jacket that’s on sale that you just have to have, you charge it on yet another credit card.
See the problem here? Eventually all of your hard-earned cash becomes money used to finance your previous debt, which forces you to borrow more to support your existing needs and desires, which only causes you to compound and worsen the problem.
You begin to finance your lifestyle, and everything you earn is actually owed to someone else the moment it hits your bank account. You just get to touch the money for a couple days before handing it over to it’s rightful owner: your creditor.
You know, the ultra-wealthy company that’s happy to give you credit for as long as you need and pay it back with extremely low minimum payments, of which the majority is just the interest they’re collecting for their own profit line and not actually paying down your principle balance.
It’s almost like you’re a hamster on their wheel, giving it all you’ve got and yet never getting ahead.
If you’re a homeowner and this situation sounds familiar, there may be some light at the end of the tunnel.
Home values are also near a record high, meaning you probably have more equity than you’ve ever had before, and with mortgage rates still low, you can utilize your equity to pay off your high-interest credit card debt.
To see how this works in action, imaging a situation where you owe $20,000 in credit card debt.
Let’s say you have 12 credit cards with various balances and your minimum payments on the cards total $700 / month.
Between your mortgage payment and your credit cards, you’re paying a total of $2,350 / month.
Remember: this doesn’t include the $400 auto loan payment, $580 groceries, $60 car insurance, etc. Your total monthly expense is actually much higher.
If you have an income of roughly $60,000 / year ($5,000 / month), this means you’re essentially living paycheck to paycheck. After all bills are factored in, there isn’t a whole lot left over.
By refinancing your mortgage and borrowing from your equity, you could consolidate those high interest bills into one small and easy payment. It would look like this:
Let’s assume closing costs are between $3,000 and $4,000 rolled into your loan, giving you a new total balance of $274,000.
You would go from paying $2,350 / month total, to a single payment of $1,790.
That yields you a savings of almost $560 / month, and aside from your mortgage and auto loan, you are debt free!
Which brings us to…..
Life after debt.
Now that you have no credit card balances, you’re free to start fresh and begin saving. In order to stay debt-free, it requires a change in mindset. You don’t buy things you can’t afford, you don’t get yourself into debt, and you don’t try to “keep up with the Joneses”.
To put it simply, you earn what you have and you have what you earn.
Without all of the debt on your shoulders, you have a tremendous advantage over most Americans who may look successful but under the fancy designer shoes and shiny car actually have no real foundation to stand on.
You’ll have tangible money in the bank, which you can utilize to invest in your future and create a much better life for yourself and for your family. If you can save a small nest egg, you can turn it into a fortune. The good news is that you don’t need to be some super savvy financial guru to get there, either. It just takes a little patience, discipline, and a plan.
If your goal is true financial freedom, there’s a lot that I could write on how to get there. However, a subject like that deserves an article of it’s own (or several), so if you want to learn what to do from here, please leave a clap and follow to stay updated when new articles are released.
As a licensed loan officer I would be happy to go over a no-risk analysis with you to see how your situation could be improved.
Until next time,