Household Debt Hits $12.7 Trillion: Here’s How You Can Handle Your Loans

household debt

According to the Federal Reserve Bank of New York, Americans have more debt than ever before.

Household debt has reached $12.7 trillion, an amount mainly spread out among mortgages, student loans, credit cards, and auto loans.

Many economists see this uptick in debt as a sign of economic recovery. But for the individual borrower, debt can be a major burden.

If you hold a share of this $12.7 trillion in household debt, here are some tips for getting out of the red.

1. Find the best student loan repayment plan

Student loans play a big role in our current national debt. In fact, student debt increased from $500 billion in early 2007 to over $1.34 trillion today.

According to data from the Consumer Financial Protection Bureau, $8.2 billion of those loans belong to subprime borrowers with a credit score of 580 or lower. That level of subprime debt is 32 percent higher than it was a year ago.

So it’s no surprise that student loan default rates have also gone up. The New York Fed reported that 11 percent of student loan balances have been delinquent for 90 days or more.

If you borrowed money for college or graduate school, you know how burdensome student loans can be. But defaulting has a host of bad consequences that can hang over your head for the rest of your life. You need a plan of attack for your student loans.

Whether or not you’ve graduated yet, take time to write down the details of your repayment plan. If you can’t meet your payments, look into income-driven repayment plans or student loan refinancing.

Thanks to these options, you’re not stuck with your current terms, interest rates, or loan servicers forever. You can change your plan, make your payments more manageable, and avoid default.

And if your payments aren’t too high, consider paying your student loans off early. Throwing an extra payment at your loans here and there can help you overcome your debt faster.

2. Pay off high-interest credit card debt first

If you’re struggling with high balances on your credit cards, you’ll want to tackle that first. Credit card debt makes up $764 billion of the current total debt. The average interest rate on a credit card is about 13%.

If you’re revolving a balance with such a high interest rate, consider whether paying off your credit cards deserves your primary focus. You might be able to transfer your balance to a new card to take advantage of 0% promotional APR.

It could also be a smart move to take out a low-interest personal loan to tackle your credit card debt. Whatever you choose, your goal is to reduce the money you waste on interest.

If you’re a new grad getting a credit card for the first time, strive to pay it off in full every month. There’s a persistent myth that carrying a balance helps build credit. But in reality, carrying a balance just costs you more money.

So, try your best not to spend more than you can pay off every month. By making on-time payments and reducing debt, you’ll build a strong credit score.

3. Balance mortgage payments with saving for retirement

Mortgages make up the greatest portion of our $12.7 trillion in debt. In fact, Americans owe $8.6 trillion in housing loans, even more than they did in 2008.

But economists aren’t too worried about another global financial crash. According to the New York Fed, lenders seem to have cleaned up their practices when it comes to assessing candidates.

The report showed that 61 percent of new mortgages went to borrowers with strong credit scores of 760 or greater. In 2008, only 36 percent of new homeowners had credit at this level.

Presumably, homeowners today are more equipped to handle their mortgage payments than those 10 years ago. Some may even strive to pay their mortgage off early.

But with the average interest rate for a 30-year fixed mortgage around 4%, according to Wells Fargo, it might be smart to stick to the standard plan and put your extra cash elsewhere.

For instance, it could pay off to invest extra income in a retirement savings account instead. Or you could put it toward loans with higher interest rates.

By weighing your various responsibilities, you can put your monthly income where it will go the farthest.

Avoid taking on more debt than you can handle

While some economists hail the new debt stats as a sign of economic growth, you should still be cautious about taking on too much debt.

Before signing on the dotted line of any loan, learn the details of your repayment plan and make sure your payments fit within your monthly budget.

Loans can help you earn your degree, establish a career, or a buy a big-ticket item like a house or car. But if you’re looking to borrow, first put a plan in place to manage your finances so that you’re in control.

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