Killer debt

Jan 01, 2008, 5:00am

The worst financial foe, unmanageable personal and business debt, has reached an alarming level in the United States. According to Cambridge Consumer Credit Index, an astonishing 42 percent of Americans are paying only the minimum due on their credit card balances each month. Chip away at existing debt little by little, starting by paying off the smallest balance.

America's total debt in 2006 stood at $48 trillion. That's 70 times what it was in 1957, and it's climbing at a startling rate. Total debt, defined by the Federal Reserve, is the combined debt at all levels of governments and all private debt in the business, financial and household (including mortgages) sectors. That averages out to $161,287 for every man, woman and child in America. Adjusted for inflation, that's nearly six times the 1957 figure.

Of course, you can't do anything about government debt, but you would be wise to keep a tight rein on your personal and business debt.

According to Cambridge Consumer Credit Index, an astonishing 42 percent of Americans are paying only the minimum due on their credit card balances each month, all but guaranteeing a swift descent into the credit card abyss.

How did we get here?

Of course, all of these figures are mathematical averages, subject to the usual arguments about methodology. However, regard-less of the method used for calculation, it's clear that millions of Americans, including well-paid professionals, are struggling in the grasp of the Credit Monster - and fighting a losing battle.

How did this situation reach such an alarming level? Many people have only themselves to blame, with their unquenchable thirst for acquiring goods and a failure to grasp even the fundamentals of financial management.

But that's not the whole story. By making credit so easy to acquire, even for people with lousy credit records, creditors must shoulder a heavy part of the blame. In any event, your job is to make certain that you don't get caught up in the swift current of unmanageable debt.

Skillful debt management requires an understanding of the difference between "good" debt and "bad" debt.

Examples of good debt are such things as a mortgage on a home that provides shelter and may appreciate in value, as well as investments in business equipment that help to increase business income.

Auto loans and credit card debt are examples of "bad" debt. Going into debt for goods that immediately begin a sharp rate of depreciation with no chance of capital appreciation or income enhancement is one way to increase your ratio of "bad" debt. Perhaps the prime example of "bad" is the loan you took out on your automobile.

According to USA Today, the average auto loan was for 63 months in 2004, with some going as high as 80 months. That means that some borrowers will never own a fully paid-for automobile.

For most people, credit card debt is the most fearful adversary standing in the way of a comfortable financial future.

Perhaps credit card debt - business or personal - is not a problem for you. If so, congratulate yourself on your financial acumen. You've separated yourself from the crowd.

However, if you are carrying significant credit card balances and not paying off the full amount each month, your most important and immediate financial objective should be to correct that situation.