If you want to hit the mute button on conversations at any dinner party, family outing or evening at the pub, bring up the subject of debt.
Nearly every adult in the U.S. has some form of debt, but 99% of us would rather argue about religion and politics than ask for advice on debt management.
Tackling debt is a touchy subject because the American consumer is on a record-setting pace that embarrasses most of us.
- The Federal Reserve confirmed that in the summer of 2017, consumers had $1.021 trillion in outstanding credit card debt, easing past the previous record of $1.02 trillion set in April of 2008.
- Along the way, the credit card carrying population soared to 171 million consumers, easily beating the previous high of 162.5 million card carriers in 2005.
- Total U.S. consumer debt in 2017 was $12.84 trillion or about $200 billion more than the record $12.68 trillion we owed in October of 2008.
- Most of that is housing ($8.7 trillion), but all categories were up, including student loans ($1.34 trillion) and auto loans ($1.2 trillion).
Amazingly, many consumers are ignoring these obvious warning signs. A December 2016 survey said that 25% of Americans rated themselves debt free, up from 14% in 2014. Almost half the people surveyed said they have less debt than their closest family and friends and 72% claim that if their debts were wiped out, they would put all that money into savings!
If that’s true, there is reason to be encouraged. However, if you’re like most people, there is no windfall of cash coming in your immediate future. Things like unemployment, medical emergencies, business setbacks and divorce can complicate your situation and make paying off debts a real battle even for the most frugal spenders in the population.
The good news is that there are debt-relief options available. With enough planning, hard work and persistence, consumers can find their way back to solid financial ground.
Here some advice on how to take control of your finances.
How to Avoid Debt
The best financial option is, of course, to avoid debt entirely, rather than dig yourself out of a hole. If your bank account is in the green, make sure to keep it there. Deposit a consistent percentage of your weekly paycheck in the savings account until you have built at least a six-month emergency fund.
Here are some more strategies to help you avoid excessive debt:
- Make a budget, and stick to it. This is by far the best way to manage your money effectively. An accurate account of spending is the best way to address debt problems.
- Set realistic financial goals. Don’t expect to get out of debt overnight. It usually takes a 3-4 year plan to pay off all debts and establish a solid financial foundation.
- If you can’t pay cash, don’t buy it. That goes for every purchase, except a home. Having to pull money out of your pocket is an excellent way to avoid impulse purchases.
- If you use a credit card, pay on time and pay more than the minimum amount due.
- Monitor your credit card accounts for changes in rates or fees.
- When you have a mortgage or auto loan and know you’ll have trouble making payments, contact your lender and ask if they will work with you. If you’re prepared to make some kind of payments, they should help you get through the difficult period.
Good Debt vs. Bad Debt
While debt is ubiquitous in American society, not all of it is bad. Yes, there is such a thing as good debt. Most Americans would not be able to afford a house, a car or a college education for their children if they didn’t take out loans to pay for it. Anytime you borrow money and use it to generate more income, that’s consider “good” debt.
Good debt is defined by three factors:
- The money is used to purchase something that is a necessary part of your life.
- Repaying the debt does not blow up your budget. You can afford the monthly payments.
- You have a plan to repay the money in a reasonable amount of time.
Good debt also typically adds long-term value to your property. Mortgages are good not only because they provide necessary shelter, but also because homes typically appreciate in value, adding to your net worth over time.
Student loans are similar. Although you’ll be in debt for several years after school, a college graduate can expect to earn at least $1 million more than someone with a high school degree. The extra money you earn will make up for the cost of money borrowed to attend college.
Bad debt is the opposite and may be marked by any of these qualities:
- Whatever you purchased with credit cards or borrowed money – car, home, clothing, small business – depreciates in value.
- You didn’t really need the item. Very typical of credit card purchases.
- You can’t afford repayment plan. This impacts a lot of consumers, but especially inexperienced ones who don’t factor in the cost of borrowing money
The worst and most common type of bad debt is credit card debt.
Debt can also be divided into long and short term. Long-term debt includes mortgages and student loans. Short-term debt includes credit cards, car loans, 401(k) loans, medical costs, legal bills, alimony and payments to the IRS.
Do You Have a Debt Problem?
ch of it. How much debt you can afford is based on your income and your ability to pay. There are warning signs that you have too much debt or are about to lose financial stability.
Ask yourself the following questions, and be honest with your answers:
- Over time, is an increasing percentage of your income going toward paying debts?
- Do you pay your bills late because you don’t have enough money?
- Have you stopped paying some of your debts?
- Are you paying the minimum on your credit cards because you can’t afford more?
- Are you using cash advances on your card(s) to pay for essentials like groceries, utilities, etc.?
- Do you utilize payday loans?
- Have you maxed out your credit limit(s)?
- Do you have little or no savings?
- Have you borrowed money from friends or relatives?
- Have debt collectors begun to call you, or send overdue notices?
- Are you constantly worried about money?
- Are you and your spouse fighting over money?
You Can Fix Your Financial Situation
If you answered yes to more than a couple of those questions, you have a debt problem, but you still can change the future of your financial situation. You can do what others have done successfully – face this challenge. Stop making excuses. Professional debt help is available.
The choices for professional help include:
- A nonprofit credit counseling agency
- A local credit union
- Community service organizations
- Church affiliated organizations
Each of these possibilities has strengths and weaknesses, but all are focused on finding ways for you to live within a budget that allows you to eliminate debt.
The most reliable choice is probably a nonprofit credit counseling agency because educating and assisting people with debt problems is the focus of their business. Their advisory services are free, which is attractive, but more importantly, their counselors are trained and certified by national organizations.
There are many nonprofit counseling agencies listed online, but before you choose one, be sure it’s approved by the National Foundation for Credit Counseling (NFCC), or at least endorsed by the Better Business Bureau. The NFCC is the largest and longest-serving nonprofit financial counseling organization in the U.S. The NFCC trains the credit counselors in its member organizations to promote financially responsible behavior and deliver quality financial education and counseling services.
Their services usually include recommendations on a strategy to get out of debt.
Here are five debt help strategies to deal with your debt:
- Debt Management Program: You work with a nonprofit credit counseling agency that enrolls you in a debt management plan. The plans should reduce the interest rate on your debt to somewhere near 8% and make monthly payments affordable.
- Debt settlement: You offer a lump-sum payment to a creditor that reduces the amount owed by 25-50%. If accepted, the debt is settled, however, this is a negative on your credit report for seven years.
- Debt consolidation loan: Combines all your debts into one loan and pays them off, then you repay the loan. This too should reduce your monthly payment.
- Bankruptcy: You file for either a Chapter 7 bankruptcy, which forces you to sell all assets and use the money to pay back creditors, or a Chapter 13 bankruptcy, which allows you to keep some assets and sets up a 5-year repayment plan.
- Do nothing: If you have little income or property and don’t expect things to change, you can do nothing, and you may be what’s known as “judgment proof.” Collectors will still hound you for payment and may even sue you, but since you have no ability to pay, any court judgments against you will be fruitless.
No matter how your finances currently look, you can improve them. Figure out what option is best for you, and then make a commitment to repair your finances and get back on track.
Debt Help for the Military
Debt is a burden for many American families, but it might strike hardest at those who serve in the military. Low pay, frequent relocations, inexperience managing money and problems with spouses finding and retaining employment are just a few of the ways military families fall into debt and stay there for some time.
When the situation reaches a crisis stage, military families often make it worse by resorting to payday loans or car title loans, where interest rates start at 400%. A 2015 survey said that military families have $13,700 in unsecured debt, most of it on credit cards.
Fortunately, the Servicemembers Civil Relief Act (SCRA), a federal law passed in 2003, offers military families some protections that include:
- Limits interest rates on any loan, including credit cards, to 6% while servicemember is on active duty.
- Protection from eviction for missed mortgage or rent payments
- Termination of property and auto leases, plus cell phone contracts if servicemember receives active-duty assignment.
- Protects servicemembers from default judgments.
All of that helps keep the debt collectors at bay, but it is still up to the servicemember to get his or her finances in order and be responsible for the debts they accumulate.
If you are having financial difficulties, ask your commanding officer for help or request assistance from the financial aid counselor at your base. If you prefer to deal with it yourself, it would be wise to call a nonprofit credit counseling agency and get free advice from them.