How high is your household debt ceiling?

It’s been hard to avoid reading about the ever-increasing size of the federal deficit and various ideas about what to do about it. Most of us don’t have any direct influence over decisions made in Washington, but what about our own personal spending and the height of our household debt ceiling? This kind of spending we can control, and when we recognize a problem, we can choose our response.

Of course, overspending is closely tied to credit card debt. The level of credit card debt in the United States has actually decreased during the past few years of financial crisis and sluggish recovery. But credit cards still play an enormous role in the financial life of most households. According to a Federal Reserve Bank survey, Americans hold almost 610 million credit cards, more than three per household. The typical American gets a first credit card at the age of 20, often while still in college, living at home, or not employed full time. The average credit card debt carried by households with a revolving balance currently is $14,750. In addition, of course, there is often a mortgage, auto, or student loan debt.

Good Debt versus Not-So-Good Debt

Debt is actually a double-edged sword: it can be either a positive or a negative influence on your financial well-being. Good debt includes sensible financing for a purchase that will outlast the duration of the loan and provide positive leverage in a way that gets you more bang for your buck. For instance, a home mortgage can allow you to enjoy your home (which should last longer than the term of the loan), allow you to build equity, and give you a mortgage interest income tax deduction. Likewise, a three-year auto loan for a fuel-efficient vehicle can provide positive leverage if you use it for employment and increased earning potential.

But what about using credit cards to pay for dinner out, or for a spur-of-the-moment Caribbean vacation, or a latte every morning on the way to the office? If you’ve been lugging a balance around for years while making only the minimum payment, you might want to think about where your choices are leading you. Now that issuers are required to disclose the long-term effects of making only the minimum payment, it’s a lot harder for those of us with spending issues to pretend we’re not aware of what we’re doing. It can be more than a little sobering to see just how much our fleeting pleasures are going to cost us down the road if we fail to adjust our habits.

Controlling Spending

If you’re living in a household that perpetually carries a credit card balance or you sometimes feel you’re at risk of heading in that direction, what are some ways to patch the cracks in your financial foundation and improve your peace of mind going forward?

• Focus on savings. Setting money aside upfront to use for a vacation or other desired discretionary purchase can help reduce the temptation to use credit card financing to give yourself the reward you feel you deserve. Watching the vacation or other fund accumulate can bring its own satisfaction.

• Use cash. More than one study has shown that consumers who use a credit card buy more than those who use cash. Give yourself an allotment of cash to spend each week and see how clever you can be in maximizing the value you receive for that amount.

• Pay off the highest rates first. Make a list of your credit card debts and the corresponding interest rates. Focus your strategy on paying as much as possible toward the balance with the highest rate while making the minimum payments on the others.

• Track the small stuff. Keep receipts for every expense or a journal of the amounts you spend on discretionary purchases. It’s hard to cut back, and easy to deceive yourself, if you don’t know exactly where your money goes.

• Share responsibility. Knowing that money stress hurts marriages and other partnerships, sit down together to set a spending strategy. Teach children the rewards of sound financial habits (the Money Savvy Generation website, www.msgen.com, has great resources such as the Money Savvy Pig for youngsters and the Cash Cache for teenagers as well as materials for parents and teachers).

• Freeze the cards. If you can’t bear to cut up your credit cards but still need a serious change, freeze the cards in a block of ice. You know they’re there if you really need them, but you can only use them with foresight and planning.

Don’t let dysfunctional spending get a grip on your household. If consumer debt is using you rather than the other way around, say “no” to the plastic and reward yourself with financial peace of mind.

Click here to learn more about Claire Emory.