CHICAGO — It seems like common sense: Don’t take on more debt to pay off your bills.
Yet debt-laden consumers routinely do just that, even as they criticize the federal government for efforts to raise the debt ceiling.
Total consumer debt including mortgages was $11.5 trillion at the end of the first quarter. Americans then piled more on to credit cards in April than in any month in three years.
Like the government’s situation, it’s past time to attack debt more aggressively and slash spending to get it down.
“It’s time to look in the mirror and think about modeling the kind of behavior we want from our country,” says Eleanor Blayney, consumer advocate for the non-profit Certified Financial Planner Board of Standards.
These five essential tips for managing debt can help you avoid potential pitfalls:
Keep a lid on it.
A good benchmark for your personal debt ceiling is to limit total debt to no more than 40 percent of your gross income. When households have to pay more than that every month it’s generally an indicator of financial distress, according to the Federal Reserve.
Understand your credit report.
Having good credit is more important than ever, and with more far-reaching consequences.
Without it, says Blayney, it can be difficult to get hired or rent an apartment because employers and landlords now commonly look up credit reports.
Carrying a heavy debt load can have a significant impact on your credit score, not to mention leaving you more vulnerable in emergencies.
“Good debt” isn’t as good as it used to be.
Student loans and mortgages are considered good debt.
Even though a college education may pay off financially in the long run, today’s graduates can end up with low-paying jobs or none at all. That can make heavy student loan obligations all the more difficult to pay off, tarnishing a job-seeker’s credit report and compounding the challenge of finding work.
Avoid lingering credit card debt.
Part of keeping debt from mounting has to do with not just making the minimum payments. Those now-required monthly updates from your lender telling you you’re on pace to pay off your credit card in 23 years should help remind you to pay more.
Excluding your mortgage and car payments, the target should be to have no more consumer debt than you can pay off in 12 to 18 months, says financial planner Jeff Kostis, president of JK Financial Planning in Vernon Hills, Ill.
Pay attention to fees and fine print.
Consumers who aren’t careful can end up paying a significant amount in hidden fees and other costs when they use credit.
Banks looking to make up for revenue lost when Congress tightened credit card policies in 2009 are looking to partially compensate through new or increased fees. There can be fees for phone support, foreign transaction fees, over-the-limit fees and even inactivity fees. So when using credit, make sure you understand all the fees and penalties you might be subject to.
