More Loans, and Defaults
The New York Fed released the Quarterly Report on Household Debt and Credit earlier this week. Household debt soared past $16 trillion in the second quarter, reflecting a 2% jump from the first three months of 2022. The report also indicated lower-income borrowers and subprime loans are facing increased delinquencies.
Digging in further, credit card balances rose above $46 billion in Q2, which the Fed partially attributes to seasonal spending patterns. That said, the overall number grew 13% from the same time period in 2021. That’s the categories’ biggest increase in over 20 years.
List, and Strategize
Financial advisors say the two most basic steps you can take in your effort to overcome debt is to list out everything you owe, and then pick a plan of attack. First write out all your loans and the terms associated with them, including interest rate. This will include mortgages, auto loans, student loans, and smaller debts like a cell phone purchase you may have financed.
From there, it’s a question of strategy. There are three common debt payoff strategies: the debt snowball, the debt avalanche, and the debt fireball. The debt avalanche method makes use of math. you pay off the balances charging higher interest rates first, and proceed from there. The debt snowball method goes in the opposite direction, paying off the smallest balance first to build confidence and momentum. The fireball strategy takes a hybrid approach to the traditional snowball and avalanche methods of paying down debt.
Some individuals opt for debt consolidation, in which a larger loan is taken out to pay off other debts, so as to narrow your repayment focus.
The Big Three
Once you’ve laid out your debts and considered how to go about paying them off, there are three more big steps that could benefit you. The first is to explore what refinancing options are available, with the goal of securing a lower interest rate.
Next focus on reducing your expenses. While this is the type of financial advice your grandparents might offer, it’s especially important when paying off debt. Bringing on a roommate or selling your car are potential steps. Finally, it could be the right time to seek out a new job or request a raise. Upping your income means expanding your ability to pay down debt on a weekly or monthly basis. Debt is on the rise as prices spike, but with the proper discipline you can right the ship.
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