On June 5, Market Watch reported that, for the seventh month in a row, Americans paid off more debt than they took out. We should all give ourselves a collective pat on the back for that. Its great. The numbers are mind boggling. In March, the collective debt dropped $16.6 Billion. In April, it dropped another $15.7 Billion.
That still leaves us with a lot of debt. Right now, we all have about $930.9 BN in credit card debt and $1.59 Trillion in other non-credit-card debt. The numbers don't include mortgages and home equity loans. The raw data is available from the Federal Reserve.
The Federal Reserve also calculates something called the Debt Service Ratio, or DSR. This is an interesting little number that compares debt payment to disposable income. A DSR of 1.00 would mean that, for every dollar we have of disposable income, we owe one dollar in debt. A DSR of 5.00. would mean that we owe $5.00 for every dollar we have in disposable income.
By disposable income, we're not just talking about money we have to go to the movies or out to dinner. That is part of our disposable income, but disposable income actually refers to our gross income minus taxes. Disposable income means all of the money that we have available to us for spending or saving.
Okay, here's where this gets really a bit disgusting. The overall DSR for the third quarter of 2008 was 13.80, up from about 10.60 in the early 1980s. The good news is that is down from an all-time high of 14.29 in the third quarter of 2007, but it still means that, for every dollar we had to spend or save in 3Q09, we owed $13.80. Even worse, that assumes that we're only making the minimum payments on our credit cards. If you want to see it for yourself, you can go to the Federal Reserve Board's Household Debt Service and Financial Obligations Ratios page.
I'm not above this. I owe more than a year's worth of disposable income on my student loans. Luckily, I paid off my car at the end of last year. Many of us have debt for good reason. We are still wise to get rid of them as quickly as possible.
About a year and a half ago, my sister told me about Dave Ramsey. When I first heard him, I was a bit resistant. His attitude towards debt seemed a bit extreme. Still, I kept listening to his show as a podcast from time to time, and in the Spring of 2008, I took his Financial Peace University at a local church. I've come to really respect the man and what he teaches. Now, I have not shredded all of my credit cards. They're there like a little security blanket, but I avoid using them as much as possible. Chase just sent me a letter telling me that they closed my account because they figured I didn't need their it because I hadn't been using it. I'm working hard to get rid of the debt that I have. I've hear Dave quote Proverbs (22:7) too many times, saying "The rich rules over the poor, and the borrower is servant to the lender." That is as true today as it was in ancient times. With a DSR of 14:1, we are certainly not working for ourselves.
So, back to consumer debt. According to indexcreditcards.com, the average credit card rate in the US was 14.30% on May 20, 2009. That means, if we make a minimum payment of 3% on our credit cards, we rack up $10.89 Billion in credit card interest every month.
Congress passed the credit card reform bill last month, and credit card companies are squirming. If we keep up like we have the past two months, though, we can go a long way to reforming credit card companies, and America. Imagine what we could do with a spare $10.89 Billion each month. And, in with the markets running down and sideways, paying off our debt has a much better rate of return than most mutual funds going.
Leave a comment