Credit is the privilege of being able to borrow money without having to pay it back immediately. It allows you to spend now and pay later over time. Unfortunately, consumer debt occurs when people use credit for consumption purposes rather than investment purposes. This means what is purchased has no long-term financial benefits, but rather it is used for basic needs such as groceries, gas and other basic living necessities. This creates outstanding consumer credit.
Average Debt
According to CNNMoney.com's article, "Top Things to Know," the average household owes about $10,700 with an interest rate that settles in the high teens. Although families have a variety of debts to pay off, experts say it is wise to start with debts that hold the highest interest rates. These are the worst debts because minimum payments barely cover the interest causing it to take years to pay off the given balance. By focusing on higher interest debts first, you save yourself from paying thousands more in interest over time.
Interest Rates
The average credit card interest rate is around 13 percent. Ideal interest rates are, on average, 9 percent. It is important to find a credit card that offers a fixed rate if possible. Most consumer debt situations involve irrationally high fluctuations in interest rates making it almost impossible to actually pay what you owe because of the extra fees charged to every dollar that has been spent in credit.
Types of Debt
There are two types of consumer debt: revolving and non-revolving. Revolving debt is debt that can be re-borrowed once it is paid off. This revolving debt is credit card debt. Once you make payments on a credit card, credit is reimbursed and available for you to continue using. This can become problematic if you do not pay off your credit card every month and pay the minimum each month. Non-revolving debt are loans such as student loans or car notes. These debts are for a specific purpose, such as education, and do not offer future credit.
Repayment Calculators
Credit card repayment calculators are very helpful in learning what your minimum payments should be each month to successfully pay off your credit cards. Outstanding balances and high APR rates are detrimental to making progress because the minimum payment in these cases only covers the interest and does not touch the balance. Knowing if this is the case is helpful in what you need to pay per month to progress in paying off consumer debt.
Credit Myth
Liz Pulliam Weston wrote an article in MSN Money stating that closing accounts is not the way to help your credit score. Keeping accounts open shows credit history which is important in raising your credit score.
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