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How Important Is Staying Current On Credit Card Debt?

How Important Is Staying Current On Credit Card Debt?

The Credit Crisis

How often have we read or heard the phrase "good credit, bad credit, no credit at all, we will finance everyone!" One answer to that question is, "way too often!" Our consumer driven economy of the last decade has led to a behavioral modification regarding our borrowing habits that would shock our parents and grandparents. In an apparent effort to match the example set by government, Americans have amassed huge amounts of debt by making purchases that, in the past, were largely financed at least partially by savings.

According to the Bureau of Economic Analysis of the US Department of Commerce, Americans save less than 3% of their disposable income. In 2006, we actually had a negative savings rate, as shown on the chart below. To contrast these figures, Japan, for example, has had an average annual household savings rate of 22% of income since World War II; India has reported an average annual household savings rate in excess of 30% of income for the last 10 years.



When we couple our voracious appetite for consumer goods with our poor savings habits, we have the recipe for disaster which is largely responsible for our current economic woes.

What’s the Solution?

I don’t believe the answer is going to be found in the endless flow of television commercials, infomercials, and questionable "legal advice" encouraging us to "walk away from credit card debt," or to "negotiate with your credit card company; you don’t have to pay your full balance!" While it might be tempting to fall prey to one of these offers, these tactics will come back to haunt you without a doubt, and there are generally substantial fees collected by those touting these solutions. There is a much more viable solution: get a grip on spending and make your best effort to pay something on your debt each month.

There is nothing wrong with attempting to negotiate a payment plan, or even to try and negotiate lower rates which would make it more likely that you could meet your monthly payments. However, if you abandon any effort to meet your debt obligations, the result will be a bad credit history that will follow you for many years.

Pay Yourself First

Some years ago I had a client whom I met just after he had realized a dream to open his own restaurant. I asked him how he financed all of the equipment and furniture and fixtures. He said that he had saved as much as he possibly could from every paycheck from his "regular job" for about 5 years. Then, he went to the bank and took a business loan for the full amount of his savings account. He used his savings account as collateral. I asked him why he did not apply for a loan based on the furniture and fixtures and equipment, and he said "because I want to pay myself first every month." His perspective was that since it was his hard earned money at risk, he had greater incentive to make the restaurant work if he was using his own money. Therefore, he wanted to “pay himself first” to become debt free as quickly as possible. Not everyone is able to follow this path, so we need to keep our credit lines open. In recent weeks as lending has been drastically reduced by many institutions due to the uncertainty concerning risk; many lenders have had to tighten their credit risk standards in order to make credit available. For those who have maintained a good record of paying down credit card and other consumer debt, it is more likely that they will be able to borrow as needed. Since we never really know what our borrowing needs may be at any given time in the future, it is a sound financial strategy to remain current on all of your debt obligations, and whenever possible "pay yourself first!"

©Patrick J. Catania 2009
The views and opinions expressed herein are solely those of the author and do not necessarily reflect those of Baxter Credit Union, its Board of Directors, or its employees. The author is responsible for the content. Readers should consult with, and seek professional advice from their own attorneys, accountants, and financial advisors with respect to their individual financial needs and circumstances.

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