Drowning in Debt -- How to Tread Water

My eye was caught this morning by a brief article in my local paper on high personal debt rates being due, not to frivolous consumer spending, but to the increasing costs of three basic items: housing, health care and education. The article was extracted from the Washington Post, so I went to the source to attach a link to the full original article for you. Most of us living through the facts can nod knowingly, but here is an extract:

Real wages, after adjusting for inflation, have been flat since 2001, according to the study, while the cost of big-ticket items for which families pay the most rose. In the past five years, the costs of medical care, housing, food, cars and household operations rose 11.2 percent, the study said. Many families are trying to make up the difference by borrowing, according to Christian E. Weller, author of the report and a senior economist at the center.

(snip)

"The average American family is walking a high wire and hoping there won't be a high wind," [Harvard law professor Elizabeth]Warren said.

Housing debt has climbed notably because home prices have risen and people have borrowed against the equity in their homes. From 1989 to 2004, for example, the median mortgage debt more than doubled, from $46,900 to $96,000.

Education debt, meanwhile, rose 127 percent between 1992 and 2004, from $3,427 to $7,800. Health-care costs rose, too, because insurance has become more costly and employers are shifting more of the expense to workers.

But the share of income that is going to credit cards has been relatively stable for the past decade, falling from 0.5 percent to 0.3 percent from 1989 to 2004, according to the study, except in the relatively small number of households with significant credit card debt.

(snip)

At their news conference, [senior economist at the Center for American Progress Christian]Weller and Warren urged Washington policymakers to consider the implications of consumer debt before families are crushed by rising costs and damaged credit. They predicted that otherwise, many families will lose their homes through foreclosure when bankruptcy law changes make it more difficult for households to escape debts.

Here is a link to the Center for American Progress, which explains itself as "progressive," and is headed by a former Clinton aide: link. This takes you to a summary of the report and a link for the large PDF complete report, which looks like a very in-depth study with graphs and analysis. This is evidently based on raw data from the Federal Reserve, but I have not been able to identify which of zillions of reports pop up on that site when I search it. Perhaps when you read through the whole report, "Drowning in Debt," it tells you the source of the raw data such that you can go back and look at it.

The Washington Post story makes mention of the use of credit cards to make ends meet.

Do not use credit cards to make ends meet!

You will spiral deeper and deeper into debt, and the new bankruptcy laws include special provisions about credit card debt. Better to look for ways to cut your every day expenses, though it is uncomfortable and unpleasant to do so.

If you are already receiving calls from debt collectors, here are some things that can help:

Debt Assistance Companies: Not all of them are reputable, but there are some that can help you get your spending, money management and credit card use under control. Here is a helpful intro link

Not all credit assistance companies are reputable. Some take advantage of people who are desperate for help, taking monthly payments but never paying back creditors. Here are two warning signs that the debt assistance company you are dealing with is unscrupulous:

* promises to clean up your credit report. This is illegal -- late or skipped payments stay on your credit report for up to seven years. Only time and a steady pattern of repayment can improve your credit rating.
* charges huge monthly service fees or demands a portion of your savings. Nonprofit debt assistance companies help for a minimal fee or for free, because they're paid by the creditors who approve your debt management plan. Many also receive grants from government, private-sector and nonprofit organizations, and help pay their costs through fund-raising activities.

Finding a good debt assistance company
Before you sign on with a debt assistance company, check it out with your state Attorney General, local consumer protection agency and Better Business Bureau.

Make sure it's a nonprofit firm that belongs to the Association of Independent Consumer Credit Counseling Agencies, the National Foundation for Credit Counseling (NFCC) or the American Association of Debt Management Organizations. NFCC members can use the name Consumer Credit Counseling Service (CCCS) or other names, but hold the NFCC member seal.

Avoid any company that promises to repair your credit problems in a hurry. The road to financial stability typically requires ongoing counseling and can take years.

And a helpful publication (to order in print, alas!) from the FDIC, aimed at young people, link.