Consumers are once again carrying record levels of debt, according to the latest Federal Reserve Board report. The recent holiday season was not good for brick and mortar retailers, as holiday shopping moved to online platforms like Amazon. However, credit card companies saw the benefits of increased spending, which is represented by higher personal debt totals.

Consumers are now carrying an average debt load that is at the highest level since 2009. At that time balances began a rapid decline mainly due to the high level of charge offs, rather than payoffs. Today it is estimated that 25% of the population is at the verge of financial ruin.

As of December 2015 the total debt balances were $936 billion dollars. Over a 30-day period between November and December consumers added $6 billion dollars to their personal balance sheets. This debt trap is at risk of crumbling household financial stability that could occur from any number of financial events.  

History of Debt Balances Since 2008

The last quarter of 2008 was hard on the US economy. The Federal Government stepped in to bail out major companies including banks and the auto industry. To close out the year, December 2008 saw credit card balances fall by 20%, mostly due to a rapid increase in consumer defaults, as the job market collapsed during the second half of 2008.

On December 31, 2008 debt balances were at a high of $1,004,359,000. Due to the recession there was a steady decline for the next 27 months. In March 2011, debt balances bottomed out at $792.3 billion dollars. Total consumer debt has jumped up and down monthly over the past four years until April 2015, when they began rising steadily from $857,801 billion dollars in revolving debt. As of December 2015 consumer revolving debt rose by $78 billion dollars in 3 quarters, topping out at $936 billion to end the year. At this pace we will hit $1 trillion dollars in consumer revolving debt before the end of 2016.

Who’s at Risk?

The challenge with growing debt balances is sustainability. With wage growth still lagging at 2.6% in 2015, the rising income is not supporting the rapid rate of debt accumulation. The Federal Reserve considers 3.5% to be a healthy wage growth, as workers move from part time to full time employment, and the unemployment rate holds steady just under 5%. Low wage growth and higher spending puts families with low savings rates at the greatest risk.

Credit cards are used by two different types of consumers: Transactors and Revolvers.

Transactors pay the balance in full each month and use credit cards to level out cash flow and take advantage of points and rewards programs.

Revolvers carry a balance each month and use credit cards to finance their lifestyle. This includes those who use credit to pay for basic essentials because income has fallen, and revolvers who use credit cards to support overspending or lack of financial preparedness.

The Federal Reserve Board study shows that consumers with the lowest level of net worth also carry the highest balances and highest interest rates. This group averages 15 to 17 percent interest on the credit cards, with an average rollover balance of $10,308 each month. They have few assets that would be able to cover unexpected expenses, should an emergency occur. With 29% of the population having no savings at all, it is not surprising that credit cards are used as a regular stop gap for unexpected expenditures on a regular basis. The challenge comes when the credit cards become maxed out, as there are limited options to pay debt down.

In 2015, the average household carried $130,922 in total debt. This includes mortgages, car payments, student loan debt, personal debt and credit cards. Of that $130,922, $15,762 is the average for revolving credit card debt. This translates to debt accumulation outpacing income growth for the past 12 years.

These numbers result in the average consumer paying $6,658 in interest payments per year. That is $555 per month that pads banks bottom lines without reducing balances. For a household with an income of $50,000, interest payments eat up 13% of income.

It is estimated that household income has risen by 26% over the past 12 years, but the overall cost of living has gone up 29% over the same time period. Educational costs, medical bills, food and housing, are the highest areas of growth, leaving families struggling to keep bills paid without debt accrual.

Net Worth Versus Income

Income and net worth are two different measures of stability. Most focus on a stable income as the most essential element to financial security. However, when spending outpaces income, financial security is fleeting. Spending more than comes in leaves no room for building wealth.

Net worth is a calculation that takes assets and subtracts liabilities or debts. The difference is net worth. A negative net worth means more is owed than owned, which is a sign that there are not enough funds available to cover an emergency, let alone events like retirement or college.

There tends to be a greater focus on income as a benchmark of success. When the focus is on income it is easy to justify increased spending under the assumption that income will grow and take care of increased financial commitments. Unfortunately, life is not as easy or neat as that. Income may decline, layoffs occur, and circumstances require adjustments to work schedules that may impact income. As we age, our health can impact the ability to continue working to support existing debts. When tomorrows needs are forgotten because of the demand of paying for yesterday’s purchases, families often wind up with very real financial challenges.

Solving Your Personal Debt Crisis

Discussing finances can be uncomfortable. The Federal Reserve Report points to how consumers vastly underestimate debts, compared to what lenders report. We hide our heads in the sand when we don’t track debt to improve our financial balance sheet. This can lead to being blindsided by a crisis because there is no real financial plan to cover future needs or unexpected costs.

Knowing where you stand is the first step in getting your financial house in order. How much do you owe? What are the interest rates are being charged and how much is actually reducing balances each month? Only you can decide what changes are necessary to get debt under control, so you are not just making minimum payments on balances, but genuinely reducing debt.

With total debt rising, an impeding debt crisis is just around the corner. If you are carrying debt the size of a mortgage, then it a personal debt crisis for you and your family may be on the horizon.

If you are burdened with high amounts of credit card debt and are struggling to make your payments, or you’re just not seeing your balances go down, call Timberline Financial today for a FREE financial analysis.  Our team of highly skilled professionals will evaluate your current situation to see if you may qualify for one of our debt relief programs.  You don’t have to struggle with high-interest credit card debt any longer.  Call (855) 250-8329 or get in touch with us by sending a message through our website.