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Susan Tompor: Are you playing too close to the edge with finances?

By By Susan Tompor

Detroit Free Press (MCT)

Published: Monday, Oct. 21 2013 12:51 p.m. MDT

In this May 9, 2012 file photo, a Visa credit card is tendered at opening of the Superdry store in New York's Times Square. Overall, consumers tend to be moving cautiously in part because wage gains are sluggish and the job market is far from robust.

Richard Drew, Associated Press

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The government came close to bumping into its debt ceiling, but was saved last week by a last-minute deal to avert a default. Even so, perhaps consumers should consider if they’re edging closer to the brink, too, when it comes to their own finances.

Bickering, much like what we’ve been watching in Washington, D.C., is definitely a clue that you’ve got money trouble. Are you fighting over who gets to pay for dinner? Maybe who should get stuck with all the bills?

On the plus side, several economists say that overall many consumers — with the exception of a group building an arsenal of student loan debt — seem far more on track than before the recession.

“It seems like consumers, on average, they’re taking the right steps,” said David Nice, associate economist for Mesirow Financial in Chicago.

Borrowing to replace a broken refrigerator is one thing, Nice pointed out, but taking on a large amount of credit card debt to simply upgrade all the appliances is another — and many consumers aren’t going that far.

“It’s not like we’re in a boom here with everybody out there buying whatever they want,” Nice said.

Overall, consumers tend to be moving cautiously in part because wage gains are sluggish and the job market is far from robust.

Outstanding consumer credit grew by $13.6 billion in August, but the bulk of the increase is associated with student loans backed by the federal government. The figure does not include mortgage debt; it does include credit cards and fixed lines of credit like student loans and car loans. Total household debt hit $12.9 trillion in the second quarter of 2013.

Mark Zandi, chief economist for Moody’s Analytics, said household debt outstanding is effectively flat — mortgage debt is falling, but student and auto loan debt is rising.

“Bottom line is that households remain very cautious in increasing their borrowing and leverage,” Zandi said.

Plenty of individuals, of course, lost jobs or saw paychecks cut. And many people remain too close to the edge when it comes to debt. So it can help to review the signs, especially as the calendar moves closer to the holidays and many may be tempted to borrow.

—As for college debt? What are signs that you’re playing too close to the edge with your finances?

A really, really big sign is when you have absolutely no idea how much you’ve borrowed in student loans.

“A lack of awareness of the amount of debt leads to a lack of control over spending,” said Mark Kantrowitz of Edvisors.com.

Kantrowitz said there are other troubling signs: Do you need to borrow far beyond what is allowed through federal student loans and tap into private student loans and credit cards, too?

Are you borrowing more than $7,500 a year for undergraduate school?

Will your total student loan debt at graduation exceed your annual starting salary?

Kantrowitz said that about 10 percent of college grads with bachelor’s degrees have total student loan debt in excess of their starting salaries. Roughly 20 percent to 25 percent borrow more than $7,500 a year.

Again, not good signs.

Bad money management also includes using student loan money to eat out, buy concert tickets or buy new winter coats, too. You’re not distinguishing needs from wants.

Or are you borrowing enough money to go to school full-time but only taking a few classes on a part-time basis?

—And credit card debt? What’s a sign that your debt is about to hit the ceiling?

Are you always charging $300 a month to fill up your gas tank but only paying $75 or so each month to meet the minimum on a credit card with a $3,000 balance?

Bad idea.

Katie Moore, financial counselor for GreenPath Debt Solutions in Detroit, said a clear sign that a consumer is heading for a financial mess is when he or she is constantly borrowing even what seem like small sums.

“There’s a credit card wall,” she said. “You are overspending if you’re charging more than you’re paying off each month.”

Trying to use a credit card to meet everyday bills — such as groceries, gas, going out to lunch at work — can drive up debt and cause a consumer to hit the maximum credit limit quickly.

Paul Traub, a business economist with the Federal Reserve Bank of Chicago’s Detroit branch, said one concern is that income growth has been so slow that some consumers could be using debt to support consumption. The recent increase in the use of credit could be an issue if it is used to offset slow income growth and balances aren’t paid off each month.

What’s key to understand, Traub said, is that consumers will have added even more pressure on their finances if they maintain balances on their credit cards and then face higher rates on that variable rate debt, as interest rates start to rise.

Financial problems only build, of course, if the consumer loses a job, faces a reduction in income or must deal with other unexpected costs, such as medical bills.

The one positive sign out of the recession, Moore said, is that credit card companies are not regularly rolling out outlandish credit limits on cards. Consumers cannot easily obtain credit limits of $30,000 or $50,000 as Moore said she once saw in the past.

“People are having to face the reality of their budget maybe in ways they hadn’t in the past,” Moore said.

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HOW TO AVOID HITTING YOUR OWN DEBT CEILING:

—Turn to cash instead of plastic. Budget for your expenses. Do not shop or find other ways to spend money out of boredom.

—GreenPath Debt Solutions has webinars on Wednesdays to address financial challenges. See www.greenpath.com. At noon Oct. 23, the topic is bankruptcy basics. At noon Oct. 30, the topic is how to improve your credit score.

—The Consumer Federation of America offers information about credit and debt at www.consumerfed.org/consumer-info#credit. The site includes a brochure on “Managing Your Debts: How to Regain Your Financial Health.”

SOURCE: Detroit Free Press research

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ABOUT THE WRITER

Susan Tompor is the personal finance columnist for the Detroit Free Press. She can be reached at stompor@freepress.com.

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©2013 Detroit Free Press

Visit the Detroit Free Press at www.freep.com

Distributed by MCT Information Services

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