How to determine how much debt is too much

There are lots of resources that say they can help consumers manage or get out of debt. But there are very few that try to help consumers avoid too much debt in the first place.

Many consumers, especially young adults, begin accumulating debt before they really have an understanding of what it is and how it works. Before they know it, they’re having trouble making ends meet.

In short, debt is a financial instrument that allows you to live above your means. You borrow the money to make a purchase that, if you had to pay for it all at once, you couldn’t afford.

A good example is a house. Most consumers can’t come up with $100,000 or more to purchase a home. To buy a home, most people get a mortgage, which is a loan with a term of as long as 30 years.

In most cases, mortgage debt is okay

Even though this is the largest debt most consumers will ever take on, it can be the most benign — although it wasn’t for people who purchased at the height of the housing bubble. But if the monthly mortgage payment is comparable to what the consumer would be paying in rent for a place to live, the debt becomes manageable.

That’s the key — being able to manage your debt. And this is where so many people go wrong. They run up high-interest credit card bills on multiple cards, take on a couple of new car payments and end up borrowing more money to make payments on old debt.

Before the economy crashed in the Great Recession, consumers were using debt to keep the economy growing. When credit sharply tightened in late 2008, consumers and the economy suffered.

Household debt is down

Since then, many consumers have worked hard to pay down debt. According to the U.S. Census Bureau, the percentage of U.S. households holding some form of debt declined from 74 percent to 69 percent between 2000 and 2011.

That’s the good news. The bad news is the people who still have debt have more of it. The median amount of household debt increased over this period from $50,971 to $70,000 in 2011 constant dollars.

While the stereotype is young consumers running up credit card debt, the report shows it’s older consumers who have experienced the largest percentage increase in debt.

“Those 65 and over became more likely to hold debt against their homes, and their median housing debt increased, as well, which explains a significant portion of the increase in their overall debt between 2000 and 2011,” said Census Bureau economist Marina Vornovytskyy.

This is not to suggest you should avoid debt altogether, although some people definitely hold to that view. Rather, the question is how much debt is manageable?

Debt-to-income ratio

For a clue, let’s look at it from a lender’s perspective. When you apply for a mortgage, the lender will measure your debt and obligations and arrive at your debt-to-income ratio.

This is the percentage of your monthly gross, pre-tax income that is used to pay your monthly debts. It’s a combination of two number. The first is the percentage of your income that will be used to pay your mortgage. The second number adds in other debt — car payments, credit cards, installment and student loans.

The mortgage industry wants that second number to be no more than 38, meaning the borrower’s combined debt payments each month, including mortgage, should take up no more than 38 percent of their gross, pre-tax income.

Chances are, most consumers have no idea what that number is so it is easy to get over-extended. Credit card debt is especially hard to manage because the interest rates are high and the minimum payment required isn’t usually enough to make much headway on paying it off.

Pay credit card balances in full

That’s why consumers who are just starting out should avoid allowing credit card balances to accumulate. Do not purchase something with a credit card that you cannot pay for, in full, at the end of the month. In some cases a major purchase, like a new refrigerator, could be carried for a short time. Just make sure you have a plan in place to pay it in full within a short period of time.

But when you charge restaurant meals, for example, make sure you pay for those, in full, at the end of the month. A meal at your favorite restaurant, running up interest charges of 21% each month, will turn out to be very expensive.

Avoiding too much debt requires a household budget. Make a list of monthly expenses, divided between “needs” and “wants.” Making these hard choices can help you avoid getting into debt in the first place.

Mark Huffman

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Average American Owes $8,900 in Consumer Debt and Does Not Use a Budget

According to the latest Federal Reserve figures, Americans owe a total of nearly $2.8 trillion in consumer debt – not including mortgages and home equity loans. Considering that there are 315 million Americans according to the US Census Bureau, this means that the average American owes about $8,900 in non-mortgage related consumer debt. While this may sound like an alarmingly high number, it’s even more shocking to learn that most Americans don’t use a budget to track their spending or manage their personal finances. According to a recent survey released by the National Foundation for Credit Counseling, over half of Americans (56%) do not use any type of budget whatsoever.

Coincidentally, 90% of the average debt figure is the amount that the average American spends on non-essential items each year. Based on the latest annual Consumer Expenditures report released by the Bureau of Labor Statistics, Americans are spending an average of nearly $8,100 a year on non-essential items such as dining out, clothing, entertainment, and alcohol. It’s pretty clear that discretionary, or non-essential spending has aggravated, if not caused, the consumer debt problem. If people were able cut down their non-essential spending they would have a much easier time paying off debt.

The most effective way to cut down on discretionary spending and build savings is to use a budget. Janet Kim, founder of Savvy Spreadsheets, said she saved almost $3,000 in the last four months since she’s created a budget spreadsheet and actively monitored her spending. As someone who lived paycheck to paycheck for many years prior to budgeting, Janet is now a believer in the power of budgeting. She says that her savings grew despite no major change in lifestyle and believes that the sheer act of tracking expenses subconsciously makes people spend less.

With so many budgeting solutions out on the market, it’s bewildering why so many Americans are still not using one. Janet has some theories why. She says that software solutions can be prohibitively expensive and online tools can raise security concerns. Therefore, many people are drawn to idea of an inexpensive spreadsheet that can be downloaded and accessed offline. The problem is a lack of simple templates that people actually want to use. She says, “Although there are a ton of free budget spreadsheets out there, many of them are counter intuitive and painful to use. People have a lot going on these days and the last thing anyone wants is the added stress of dealing with a complicated budget worksheet.”

Savvy Spreadsheets

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IAPDA Introduces an Important New Company Credential to Aid Consumers with Choosing the Best Debt Relief Company to Help with Their Unique Debt Situation

The International Association of Professional Debt Arbitrators, a nationally recognized provider of debt relief certification programs, is proud to provide debt burdened consumers access to another online decision making tool to help them choose the best suited debt relief company.

Los Angeles, CA (PRWEB) March 19, 2013
International Association of Professional Debt Arbitrators (IAPDA), long the provider of the debt relief industry’s leading certification training programs is very pleased to lead the changing face of the consumer debt relief industry with an innovative new measurement tool for consumers.

IAPDA has recently introduced the IAPDA  Accredited Service Center accreditation. The company of qualified members can now display the IAPDA Accredited Service Center logo on their company website and marketing materials confirming their company’s overall level of participation in IAPDA education and certification programs.

Companies of members can qualify for this accreditation by committing to IAPDA training and certification of their key staff members. Levels of participation are determined by the number of company employees who complete IAPDA programs and attain certifications, including continuing education and re-certification every two years. Platinum level companies have over 100 currently certified IAPDA members, Gold level companies have 25-99 currently certified IAPDA members, Silver level companies have 10-24 currently certified IAPDA members and Bronze level companies have 2-9 currently certified IAPDA members.

Complete industry education and professional certification is more important than ever in the debt relief industry. IAPDA programs provide a standardized foundation for the debt consultant’s professional knowledge, as well as an objective measure by which consumers can judge the expert they turn to for help.

The consumer debt relief industry today is completely focused on the consumer, with debt professionals  who specialize in each debt relief option, credit counseling, consolidation loans, debt settlement and bankruptcy working in a new and collaborative environment.

Laurence Larose, IAPDA Executive Director says, “Consumers deserve to work with debt relief consultants who totally understand all the debt relief options available and who can effectively guide them back to a debt free life.” Leading company owners and top consumer debt experts agree. They heartily recognize and endorse the complete debt relief education and the certifications earned by IAPDA members.

Consumers, creditors, collectors  and legislators can effectively search the IAPDA member database online 24/7 by either a consultant’s name, company name or city to learn the current membership and certification status of all 3400+ IAPDA members.

Larose also says, “Companies often will try to deceive consumers by displaying the IAPDA member logo on their website suggesting that all of their consultants are IAPDA certified. Consumers can now easily verify this claim and see how many of a company’s staff members, if any, have received and maintain IAPDA debt relief training and certifications.”

About IADPA The International Association of Professional Debt Arbitrators (IADPA) is the debt relief industry’s leading certification training programs. Established in 2000, they have graduated over 3,400 members, and offer online based training to both individuals seeking certification, and companies that want to certify their employees. Visit them online at


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IAPDA adds important company credential for members

The IAPDA has introduced the Accredited Service Center credential that company’s with IAPDA currently certified members can participate in.

The IAPDA Accredited Service Center credential validates an organization’s level of commitment to staff training and certification, resulting in competitive differentiation and consumer confidence. It identifies organizations that employ a significant percentage of IAPDA certified customer service and debt negotiation staff.

IAPDA certifications establish a level of comfort with consumers, creditors/collectors and legislators. It shows that a company’s staff member has met important industry requirements by obtaining IAPDA certifications, recognized and trusted industry credentials.

IAPDA Accredited Service Centers have all commited to having their customer service and debt negotiation staff members obtain and maintain current IAPDA certification(s).

Each approved company will receive a special ASC seal in three sizes and the special code to install this on their website. When website visitors click on the seal a pop-up page will display this company’s program credentials.

Each participating company will have unique information displayed but all will include the company’s name, address, phone number, ASC ID and the company’s participation level in the IAPDA program by number of employees currently certified.

The IAPDA Accredited Service Center program establishes a level of confidence with consumers. It shows that the debt relief company has met industry training and certification standards by obtaining IAPDA certifications for their staff, recognized and trusted industry credentials.

Displaying the IAPDA Accredited Service Center seal demonstrates that the debt relief company and their employees take pride in their work, and are interested in advancing individual staff skill levels and the overall quality of their business operations.

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Watch Out for Phony Debt Collectors!

The Virginia Beach, Va.-based company began making untold numbers of phone calls to Oregon consumers demanding they repay their debts or face dire consequences. The National Credit Works employees were sometimes obscene, bullying, and almost always threatening serious repercussions in the event of non-payment.

It was brutal welcome for many Oregonians to the ugly world of modern debt collectors. Debt buyers and collectors who buy consumer debt and then use hardball tactics to collect are one of the biggest emerging problems in consumer protection.

As part of National Consumer Protection Week, Oregon Attorney General Ellen Rosenblum is warning Oregonians who have been victimized by a debt collector engaging in unlawful debt collection practices to file a complaint with the Oregon Department of Justice.

In the last 12 months, the Department of Justice brought or resolved cases against several operations that allegedly used deceptive or abusive tactics to intimidate consumers. The department signed a settlement with National Credit Works that banned the company from doing business in Oregon for three years. The company also paid $2,500 into the department’s Protection and Education Fund.

“We’re going to use all our resources at the Oregon Department of Justice to protect consumers from unscrupulous debt collectors,” Rosenblum said.

The Oregon Division of Finance and Corporate Securities is also active in the fight against illegal debt collectors. Like the Department of Justice, it too has received a growing number of consumer complaints. State law requires debt collectors who have been hired to collect on behalf of the person to whom the debt is owed must register with the division.

Oregonians have certain protections under both the federal Fair Debt Collection Practices Act, and a nearly identical state law.

Debt collectors must follow certain procedures to collect on a debt. They are prohibited from:

– Misrepresenting who they are or who they work for.

– Falsely implying the amount of the debt or any legal action that can be taken. – Contacting you outside the hours of 8 9 p.m.

– Continually calling or harassing you. During a phone call, a debt collector must identify him/herself and may not threaten violence against you or your family or use profane language.

– Contacting you at work, unless they’ve been unable to reach you at your home. – Calling you more than one time a week at work. They must stop calling at your work if you request.

Evan Bedard

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Consumers who turn to payday loans may fall into debt traps

For someone who can’t pay a cell phone bill or the rent, it might seem perfectly reasonable to dish out an extra $42 to get a $300 two-week advance on a paycheck in Michigan.

After all, you’d be able to pay the bills, keep your service and avoid extra late fees.

No doubt, borrowers may be able to afford to pay $15 or $20 in fees for each $100 borrowed for some payday loans.

But the real question is can they actually afford to repay the payday loans? Come up with $300 or $500 in just two weeks? Or even in a month? It’s not a small issue, especially as regulators examine whether borrowers can afford to repay mortgages and student loans, too.

Payday lending is receiving more scrutiny. Richard Cordray, director of the federal Consumer Financial Protection Bureau, noted in a speech in February that the fees may seem small for quick cash but consumers in a financial jam could fall into debt traps if the fees pile up and consumers must borrow again to avoid defaulting and to keep making ends meet.

“I thought it was OK but it wasn’t OK because I couldn’t stop,” said a 53-year-old woman who used to work at a Detroit casino. She didn’t want her name used because she didn’t want her family to know about her financial troubles.

She told me that she got a $500 payday loan in 2009 when she was taking home about $650 after taxes. After missing some work, she needed money to cover bills.

She’d pay the loan but then borrow again and again over five months or so. One day, she found a way out when her boyfriend helped her cover the entire loan.

“That’s the most embarrassing thing I’ve ever done in my life,” she said. Lately, she’s used a short-term loan at a credit union that takes smaller payments over eight weeks, so she’s gradually paying it off over time. She says that product seems more manageable.

About 19 million Americans use payday loans each year, according to the Community Financial Services Association of America, a trade group.

Some services, like Check ‘n Go, have online calculators that can make the loans seem doable. Plug in a $300 amount to calculate the payback in Michigan and you’d see there’s a $42.45 finance charge. You’d pay back $342.45 and the annualized interest rate would be 368.91%.

The payback would vary significantly by state. In Texas, that $300 payday loan would have a finance charge of $76.15; you’d pay back $376.15 and the APR would be 661.78%.

But the small print notes this is based on a 14-day loan term.

Frankly, this is where the grab-money-here-to-pay-money-there mess starts.

“It is highly unrealistic for borrowers to think that they will repay the loan on their next payday,” according to Pew’s latest “Payday Lending in America” report.

Alex Horowitz, research manger for Pew Charitable Trusts in Washington, D.C., maintains that many people end up getting trapped in a payday loan cycle that lasts closer to five months or more.

About 27% of those surveyed in the Pew Report said a payday lender making a withdrawal from their bank account caused an overdraft, according to Pew’s report.

Lenders are able to automatically withdraw payments from borrowers’ bank accounts.

Only 14% of those surveyed in the Pew report said they can afford to pay more than $400 toward their payday loan debt in a month, the report noted.

Amy Cantu, a spokeswoman for the Community Financial Services Association of America, disputed several areas of the Pew report, noting that the typical customer uses the product for weeks or months, not years. A consumer may use the product seven times over the course of the year for a short period of time, and not all uses are consecutive, she said.

But do consumers have other options? Maybe, but they aren’t exactly cheap or obvious.

The Communicating Arts Credit Union in Detroit has a MyPayToday product that offers a loan of $500 at a time but the consumer has two months to pay it off. The annual fee is $70 — which could lead to significant savings on repeated fees if a person borrowed this way more than a few times a year. There’s also an interest rate at 18%.

Fifth Third Bank has an Early Access short-term product that was launched in 2012 and can be available for many customers with certain checking accounts in its markets, including Ohio, Kentucky, Michigan, Illinois and Florida.

Even the bank’s information acknowledges that the product is “an expensive form of credit.” A $300 advance with the Early Access product would cost $30 — or an annualized percentage rate of 120%.

But the quick loan is automatically repaid with the next direct deposit of a paycheck into that account.

And yes, you could rack up overdraft charges if you’re not careful. Fifth Third said it would not charge overdraft fees on an automatic payment to cover the Early Access loan but subsequent checks that bounce would face overdraft fees.

“Our point of view is that it’s for emergencies,” said Jack Riley, spokesman for Fifth Third Bank in eastern Michigan.

The product, thankfully for parents, is not available for the Fifth Third Student Checking Account.

As the regulators debate this one, though, consumers who are tempted to take a payday loan must honestly answer: How quickly will I really be able to repay this loan?

Average borrowers nationwide end up indebted for five months, paying $520 in finance charges for loans averaging $375, according to the Pew report.

Will the payday loan get you through a short rough patch? Or will you end up in debt a lot longer than advertised?

Susan Tompor

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Attorney General Madigan: 2012 Consumer Debt Complaints Signal Continued Economic Uncertainty, Financial Struggles

Attorney General Lisa Madigan today released her annual top 10 list of consumer complaints for 2012 in recognition of National Consumer Protection Week.

Madigan’s Consumer Protection Division received 26,316 complaints in 2012. Consumer debt was the top concern among Illinoisans for the fifth consecutive year, reinforcing the financial challenges that continue to plague Illinois residents amid economic uncertainty.

“Every year we hear from thousands of people who’ve found themselves on the wrong end of a deal,” Madigan said. “It’s now more evident than ever that even the most commonplace financial transactions have become complex and fraught with risks, putting the burden on consumers to arm themselves with as much information as they can before they sign on any dotted lines.”

The consumer debt category, including complaints about residential mortgage lending, debt collections and credit cards, grew by more than 29 percent over the previous year and comprised nearly a third of all consumer complaints reported to Madigan’s office in 2012. The year-to-year increase can partly be attributed to a marked rise in residential lending complaints. Many of these complaints were filed in conjunction with the $25 billion national mortgage foreclosure settlement with the nation’s five largest bank servicers over allegations of widespread “robo-signing” other fraudulent mortgage servicing practices. More than 20,000 Illinois borrowers have received approximately $1.44 billion in relief since the settlement’s February 2012 announcement.

For-Profit College Complaints Sign of Growing Debt Trend This year’s list also included the first-ever complaint category against schools, including for-profit colleges. Madigan’s office recorded more than 1,300 complaints about schools operating in Illinois. Nearly 95 percent of those complaints regarded unfair and misleading practices employed by for-profit colleges, including deceptive lending practices that have made for-profit college students in Illinois part of a growing generation of Americans trapped in a lifetime of financial insecurity. Americans now owe more than $1 trillion in student loans, while student loan debt has surpassed credit cards as the largest source of unsecured consumer debt, according to the U.S. Consumer Financial Protection Bureau.

In 2012, Madigan filed a lawsuit against the national for-profit school Westwood College, alleging Westwood left many students with anywhere from $50,000 to $70,000 in debt for degrees that failed to qualify them for careers in criminal justice. The lawsuit alleges that Westwood downplayed the ultimate cost of attending the college and failed to provide students with sufficient information about their loans.

“This year marks the first time that student loan issues and for-profit colleges are among the top concerns for Illinois residents, and it’s no wonder given the lengths we’ve seen some for-profit operators go to boost their bottom line, even when it has meant destroying their students’ financial future,” Madigan said.

In an effort to raise awareness about the for-profit schools industry, Madigan today released “A Primer on For-Profit Colleges,” a resource to educate students on issues of accreditation, financial aid, job placement rates and important questions to ask before enrolling in a college.

Madigan has been an outspoken critic of the for-profit schools industry. Last year, she testified before Congress and penned a letter to Congressional leaders on the mounting concerns in the for-profit schools industry. Also in 2012, Madigan settled a national lawsuit with the company behind for deceptively steering U.S. service members and veterans to use their federal education benefits with the company’s preferred clients in the for-profit schools industry.

Top 10 Breakdown The Attorney General recognized National Consumer Protection Week with Steven Baker, Midwest director for the Federal Trade Commission, Steve Bernas, president and CEO of the Chicago area Better Business Bureau and Tom Brady, inspector in charge of the U.S. Postal Inspection Service’s Chicago Division.

In addition to consumer debt and school-related complaints, Madigan noted other categories that topped her list of complaints involved identity theft, telecommunications and home repair:



1. Consumer Debt (mortgage lending, debt collections, credit cards) 7,631
2. Identity Theft (fraudulent credit cards and utility accounts, bank fraud) 2,544
3. Telecommunications (wireless service, local phone service, cable/satellite) 2,240
4. Construction/Home Improvement (remodeling, roofs/gutters) 1,926
5. Schools (for-profit, trade, universities, higher education) 1,347
6. Motor Vehicles/Used Auto Sales (as-is sales, financing, warranties) 1,173
7. Promotions & Schemes (sweepstakes, pyramid, work-at home scams) 1,113
8. Fraud Against Business (consulting, directories/publications) 900
9. Mail Order (Internet purchases, catalog ordering, television/radio) 864
10. Motor Vehicle/Non-Warranty Repair (collision/body, engines) 607

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Consumer credit card debt rises, as does delinquency rate

Consumers take on more credit card debt

Consumers piled up more credit card debt and also paid late more often in the fourth quarter (Q4) of 2012, TransUnion said in a recent report.

According to TransUnion’s quarterly analyses of credit-active U.S. consumers, average credit card debt rose quarter-over-quarter, as did the national credit card delinquency rate.

Average credit card debt per borrower rose from 2.5 percent on a quarterly basis – from $4,966 in the third quarter (Q3) of 2012 to $5,122 in Q4. Additionally, the credit card delinquency rate rose from 0.75 percent in Q3 to 0.85 percent in Q4.

“The fourth quarter traditionally results in higher credit card balances and delinquencies, much of it to do with the holiday shopping season,” Ezra Becker, vice president of research and consulting in TransUnion’s financial services business unit, said in a statement.

On a year-over-year basis, the national credit card delinquency rate rose from 0.78 percent (Q4 2011) to the aforementioned 0.85 percent in Q4 2012, but average credit card debt actually dropped. Average credit card debt per borrower was $5,204 in Q4 2011, so the Q4 average of $5,122 represents a 1.6 percent drop.

Becker continued: “Though serious delinquencies have risen seven basis points in the last year, average credit card debt has actually dropped, which is a sign that consumers continue to manage their credit well. Both credit card delinquencies and balances are below historic norms.”

Over the past decade, the national credit card delinquency rate has come in at an average of 1.06 percent in the final quarter of the year. The highest Q4 delinquency rate in the past 10 years was in 2003, when 1.42 percent of credit card borrowers were delinquent.

Average credit card debt per borrower in Q4 during the past decade is $5,389, TransUnion said, with the highest mark registered in 2009 ($5,729).

“Consumers continue to value their credit card relationships and are diligent about paying off their balances in a timely fashion,” Becker said. “This is a positive sign as more and more subprime borrowers have either entered or re-entered the credit card market.”

e-wisdom news service

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