Study: Central Mississippi residents not ‘borrowing smart’

via Study: Central Mississippi residents not ‘borrowing smart’, on clarionledger.com, on 8/14/2014.

Carrying debt has become a way of life for most Americans. Rising costs of living, a challenging employment environment, failure to establish saving habits and the nation’s lagging economic woes have collided with one of the most prosperous generations in history to create an economy in which many people rely on debt to maintain their lifestyles. The average American household carries about $15,000 in credit card debt.

But until we can reach the debt-free lifestyle advocated by many financial experts, there are some ways to make the best of a bad situation by properly managing debt. Of course, paying off debt will save the average household thousands in finance charges, will help save for the future and will put you back in the driver’s seat where your money’s concerned. For many people, though, they lack either the resources to make that happen, the will to do it, or both.

A recent study by the personal finance site Nerdwallet has determined that Mississippians and many other Southerners are not making good decisions on this front. Looking at various metro areas across the nation, the Jackson metro area is listed second-to-last — just ahead of nearby Monroe, La. — in whether they are “borrowing smart”.

Nerdwallet defines “smart borrowing” in several ways, including lowering the amount of debt relative to your income, managing your debt payments to establish good payment history and monitoring your interest rates to make sure you’re not paying too much.

The scores were created using consumer debt levels (excluding mortgages), household incomes, and credit scores to create the Smart Borrowing Score. Some key findings from the study, released earlier this week:

  • In Jackson, the average credit score is 629, the second lowest in the nation (after Las Vegas).
  • The average consumer debt of the 10 metros borrowing the “smartest” is $25,480, while the average for the 10 areas not borrowing smart is $26,520 — a difference of only $1,040.
  • The region with the most “smart borrowing” metros is the Midwest, while the South dominated the “worst borrowers” list.

So how do Mississippi families escape from the debt treadmill and become “smarter” borrowers? Here are a few suggestions:

  • Find ways to reduce your overall debt, relative to your household income. That’s a tall order for people with decreased income because of, say, the loss of a job. But if you can afford it, reducing the overall debt amounts can free up cash for needed expenses, so it’s probably worth putting off that beach vacation or new car.
  • Consider transferring balances to credit cards with a low – or even zero – interest rate. Availability of these deals depends on your credit history. Even a limited-time zero-percent offer can benefit you, if you attack the debt ferociously during the zero-percent period. But there are potential pitfalls. You could find yourself facing maximum interest rates if you make payments late, or fail to eliminate the debt during the promotional period.
  • A longtime friend (with excellent financial sense) told me once that he actually looks for these deals, so he can maximize cash flow. He always pays it off completely before the stated period ends, though, and only borrows as much as he can afford to completely repay at any time.
  • Talk to your banker about consolidating high-interest debt with a personal loan. But if you do, aggressively tackle the debt, and don’t use the cards again. Most institutions which offer debt-consolidation products will require you to close the credit accounts. (A note of warning: closing credit accounts will probably lower your credit score, at least temporarily, as a major component of credit score is the debt-to-income ratio; however, your score will rebound in time as your overall debt level decreases).
  • Seek help. Find a reputable credit counselor by visiting the National Foundation for Credit Counseling. Consider using local nonprofit organizations first. Check them out carefully, though, because there are some organizations which pretend to be nonprofit, but will actually just compound your problems by getting you into more debt.
  • Improving your credit score by reducing your overall debt and paying on time can help you get better rates in the future. It’s also a good idea to check your credit report annually (and free) by visiting http://www.annualcreditreport.com
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