Are You an Average American?



Did you know that the average American household has 13 credit, debit and store cards? It's no wonder. Most US households receive at least one offer of credit a week. They always sound like the perfect answer to your problems, too. Transfer your debt from that really big-balance card to this new one, and you won't have to pay any interest on it for six months! You'll have that debt paid off before then, right? And there's only a little balance transfer fee.

Of course, that other one will now have a zero balance. Doesn't that sound great? You'll want to use it for any new purchases, because you don't want to add to that big balance you just transferred over to the new card. And if it turns out you can't pay it off, well, by then you'll probably get another balance-transfer offer from someone else. It seems like this strategy could work forever. You might wonder, "Why doesn't everyone do it?"

The sad truth is this: The credit card industry collected 43 billion dollars in late-payment, over-limit, and balance-transfer fees in 2004. They aren't very consumer-friendly. They exist to make money from you.

If this situation is starting to sound familiar to you, and you're getting a sick feeling in the pit of your stomach, you don't need to feel alone. A Federal Reserve study showed that 43% of US families spend more than they earn. The only way to do that is to use credit. And it's pretty obvious that if you use credit to spend more than you earn, you are going to be in debt.

When Minimum Turns Into Maximum

Of course, as long as you make the minimum payment every month on all your cards, your credit report will look OK. You will probably be able to get even more cards! But is that actually good news?

Sorry about that. The answer is No.

Did you know that if you made the minimum payment on a $4,800 balance on a card with a 17% interest rate, it would take you 39 years and 7 months to pay it off? You'd pay a total of $15,619, and two-thirds of that would be interest. You'd be paying interest on restaurant meals you ate decades ago, clothes you've donated to Goodwill, and electronics from the stone age!

It's Not Always Your Fault

A 2004 research study showed that most credit card debt incurred by older Americans was due to the high cost of healthcare and prescription medications. In the same vein, anyone with a costly medical condition or emergency can find themselves deep in debt. Health insurance has caps on spending, and even if the caps aren't reached, a 20% co-pay is common in many policies. There are deductibles and supplies and drugs that aren't covered. A serious illness can be devastating to the average family's finances.

Another debt problem beginning to hit Americans this year is that the rates on their A.R.M.s (adjustable rate mortgages) are beginning to reset. With the federal reserve interest rates climbing, many people's mortgage payments have increased by 25%. If your mortgage payment is $1200, that would mean it would readjust to $1500.

So What's a Debtor to Do?

Some people take equity loans on their homes to pay off credit card debt. Of course, that means you have to pay back the equity loan-usually by increasing your mortgage payment-and if you sell your house, you'll make less profit because the equity loan will have to be satisfied. And one other thing-the interest on equity loans is higher than it is on a regular mortgage.

Others turn to one of the many credit counseling agencies advertised on TV and all over the Internet, only to find that many are simply not ethical. With mandatory counseling laws put in place for people considering bankruptcy, the industry is overwhelmed. On top of that, IRS investigations into 41 "non-profit" credit counseling agencies in May of 2006 revealed that they were not acting in the interest of the consumer and were motivated by the money they could make. They lost their tax-exempt status, and investigations into other agencies are continuing.

Bankruptcy used to be a last-ditch resort for people stuck in a bottomless pit of debt. Most bankruptcies are not the result of overspending, but occur because of huge medical bills, job loss, or divorce. In 2005, Congress passed laws that made it much more difficult to declare bankruptcy. Credit counseling is mandatory but difficult to get. Bankruptcy attorneys' fees have increased; filing fees have increased. More money than before must be paid back to creditors.

Is There a Reasonable Solution?

Yes, and it's quite simple:

To get out of debt, you need to make more money.

You need a second source of income that you can generate when and where you want to. A job that will fit in with your family obligations and won't interfere with the things you love to do. If you're determined to change your financial circumstances, a home-based business could very well be your way out of debt. After you've got the debt monkey off your back, you will probably find that running your own business is so easy and so financially satisfying, you'll want to keep at it, running your personal wealth steadily higher. You might decide to quit your "day job." Other people just like you are making everywhere from modest incomes to fortunes, and the only equipment they need is a computer and a telephone.