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How Consumers Reduce Debt May Surprise You

[Jun 12, 2010.]

 

Consumers Opting to Get Out of Debt...by Default

According to the Federal Reserve, revolving credit decreased at an annual rate of 12 percent in April. Americans have been working to reduce debt since the shock of the Great Recession. It would be comforting to imagine people tightening their belts, going without extras, and responsibly achieving debt relief. But, this does not seem to be the case. According to analysts, default is the avenue most consumers have chosen to get out of debt.

At its height in Q1 2008, the debt to income (DTI) ratio for the average U.S. household was 131%. Somewhere around 100% is what economists deem sustainable. In order to regain a sustainable level, consumers have to reduce debt by 31%, which equates to about 14 months of income going straight to debt reduction with no other spending allowed. That's obviously not possible.

As of the end of March 2010, the average U.S. household's debt to income ratio is down to 122%. In just two years, Americans have shed 9% of their DTI. This achievement would be praiseworthy if it wasn't so clear that defaults have been the primary means to debt relief. It has been estimated that consumers have defaulted on about $400 billion of mortgages and consumer loans, including credit cards.

Consumer spending makes up about 70% of the GDP. Consumers have to spend for the U.S. economy to function. By defaulting on debt, the consumer has freed up significant cash that is being spent, causing the economy to recover. If everyone stopped spending and put everything they earned toward debt reduction, the recession would be ongoing, according to analysts. But is this method fair?

Find A More Responsible Way To Get Out Of Debt

Rather than default on debt, which is a strain on the banks and ultimately costs the taxpayers, a more moderate debt solution would be to participate in a debt consolidation program or a debt settlement program. Either a debt consolidation program or a debt settlement program can improve your monthly cash flow while you remain responsible to the agreements made when credit was initially extended. Using this method takes longer to get out of debt, but preserves your integrity. Ultimately, we all benefit.

 

About Author:

Renee Morgan has been a loan officer for over eighteen years. She is also a freelance writer and guest expert for radio and TV.

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