Americans have been spending more and saving less since the 1970s. In 2007, the Bureau of Labor Statistics reported that “The personal saving rate in the United States has been declining for decades; since 2005, it has been negative.” Americans are now actually spending more money than they have.Inevitably, this spending pattern has led to increased debt for many consumers. “Culturally we spend money we don't have, to impress people we don't know,” said Gail Cunningham, spokesperson for the National Foundation for Credit Counseling (NFCC), Inc., a national nonprofit credit counseling network. “Back in the day when credit was extended with very few strings attached, people were happy to take advantage of it.”
“The availability of credit, the urge to keep up with the Joneses, the American Dream of having everything you want has spurred on the increasing debt load,” agrees Jenna Keehnen of the US Organization for Bankruptcy Alternatives, a debt settlement and negotiation organization. Until recently, it was easy for almost anyone to get a credit card... and then another... and another.
The credit edifice came tumbling down in 2008. Greed on Wall Street, manifested in gambling games with instruments based on credit, such as collateralized debt obligations, along with institutional decisions to make credit freely available and questionable lending practices resulted in the collapse of credit markets. A wave of defaults and foreclosures hit the mortgage industry. Banks and other financial institutions began to cut back aggressively on credit offers, particularly unsecured credit. According to Greg McBride, a Senior Financial Analyst for Bankrate.com, “We went from an environment where the children were bouncing off the furniture, to one where someone fell and got hurt and nobody was jumping off the furniture anymore. When loans started to go bad at an accelerated pace, lenders rapidly reassessed the risk and their willingness and ability to lend was significantly reduced.”
As consumers are losing access to their credit card crutch, they are being forced into developing better spending habits. “Everyone thought there would be no end to the free-flowing money and went on 'financial autopilot.' We all had a harsh financial wakeup call,” said Cunningham. “The silver lining is that it forced people to take back control of their finances.”
Experts agree that the first step to curing debt problems is figuring out where you are spending your money. “It's just opening your eyes and really examining where your money is going,” said Keehnen. “The first step is to take a very good look at your budget.” Consumers need to spend at least a full month writing down every single expense, from their early-morning latte to their dry-cleaning charges. This exercise can be an eye-opener. People often have no understanding of their own spending patterns.
The next step is to determine which of these expenses can be trimmed away. “Many of the expenses that are automatically coming out of their pay aren't necessary in the least, like Netflix or the HBO package,” said Keehnen. Cunningham adds, “Changing behavior is the difficult part.” However, she notes that once consumers do make the necessary adjustments, they may find that they enjoy a more frugal lifestyle. In January, the NFCC polled consumers about their level of “frugal fatigue”. While 66% were tired of pinching pennies but felt they had to continue to do so, another 21% said “they had implemented financial lifestyle changes that they found to be positive and intended to keep them in place.”
Of course, getting a handle on debt is not always as easy as cutting the fat out of the budget. “If you really aren't spending frivolously, you need to remember that it took a while to get into this mess and it will take a little time to get out,” said Keehnen. “You need to do some research and find out what is the best solution to get out of debt.” McBride suggested, “If you are having trouble making payments, consider speaking to a non-profit credit counselor. They can help with budgeting and so on, but they can also act as a liaison with creditors to negotiate better terms.”
He continued, “First, get an honest assessment of your debt including interest rates and payment terms. Then prioritize the debt payment, usually from highest interest rate to lowest. Bankrate.com has a free calculator that you can use to develop a month-by-month payment plan... and also a search engine to look for lower-rate credit cards and balance-transfer options in order to reduce interest charges and accelerate debt repayment.”
Typically, a consumer's highest interest rates will be on their credit card debt. Other debts such as mortgages, auto loans and student loans are usually charged at a lower rate. “Our average client had about 7 credit cards,” Cunningham said. “People began shopping for the 2010 holidays when they were still paying for their 2009 gifts.” She argued that consumers should ideally have no more than two credit cards – one that's used for regular purchases and paid off each month, and a low-interest card for emergencies and big-ticket purchases that is paid off within three months of each use.
For those consumers who can't work out payment plans with their creditors, debt settlement is an option. Cunningham explained that a debt consolidation company is not the same as a credit counseling company. Debt settlement agencies work out partial payment deals with creditors instead of paying the whole debt over time, so it's listed on the credit reports as a “settlement.” Since this usually has a negative effect on the consumer's credit rating, she suggests sticking with counseling if possible. “Counselors negotiate [with creditors] for a new monthly payment, so if the consumer makes their payment they're reported as current and it helps them to rebuild credit,” she said.
Debt settlement is also prone to all the abuses commonly found in a fast-growing market, and several debt consolidation companies have been investigated for false advertising and other fraudulent practices. Keehnen said, “For credit counseling, there's not a lot of harm. The debt relief plan is where the harm can come in because you're turning over responsibility for your credit to another person.” She advised consumers to watch for warning signs, like a company that asks you to pay for a service that it hasn't yet provided, or someone who asks for your social security number or bank information right off the bat. “Look for someone who will offer the initial session for free,” she suggested. “Some states require licensing – contact your local regulatory agency, which is usually your attorney general."