on July 8 | in Editor's Picks, Issue 8, Money, Your Opinion Matters | by Linda Hicks | with No Comments

Debt in America

• Incredibly, 43 percent of all American families spend more than they earn each year*
• The average student loan debt load is approximately $25,000*
• 46 percent of all Americans carry a credit card balance from month to month*
• One out of every seven Americans has at least 10 credit cards*
• Total home mortgage debt in the United States is about 5 times larger than it was just 20 years ago*

Sadly, tens of millions of American families and individuals are in debt. Some are spending their time getting deeper in debt; others are spending all their time trying to pay off their debt.

The good news is that there are resources out there that will help you pay off your debt and help you manage your finances.

Two Types of Debt

• Secured debt: Mortgage, vehicle loan, business loan using collateral. Nonpayment may lead to foreclosure/repossession.
• Unsecured debt: Most common is credit card debt; often used for “buy now pay later,” causing debt to increase; also used for legitimate items like car repairs, medical bills, etc. Not being able to pay off the balance within a year leads to reduced credit limits being available and consequently a reduced credit score. This leads to increased interest rates and payment requirements, causing even more problems for the borrower.

 

Physical/Emotional Effects of Debt

• Sleepless nights
• Stress
• Depression
• Shame
• Low standard of living
• Lack of independence
• Restricted life choices
• Inability to retire

Debt Management Options

1. Pay off the debt by yourself: Concentrate the largest payment on one card at a time, either the one with the smallest balance or the highest interest—whichever feels best to you. Paying off the balance with the highest interest rate will obviously save you money, but sometimes it may be more encouraging to eliminate one debt with a small balance to provide momentum for debt reduction. Continue to pay the minimum payment on all other debt while you do this. As one card is paid off, transfer that payment onto the next card until that is paid off. Continue until all debt has gone.
2. If you are overwhelmed and need help, talk to your local financial institution (credit union or bank) about debt consolidation options. Making just one payment a month is often easier than juggling multiple payments. If you own your home and have equity in it, you may be eligible for a low interest Home Equity Line of Credit (HELOC), which you can then use to pay off all your high interest rate credit card debt, resulting in one manageable payment per month. Alternatively, it may be possible to use collateral in a vehicle/motor home to set up a loan to consolidate debt.
3. Call a debt management company: These are nonprofit companies paid for by credit card companies so that they receive some payment. They negotiate with the creditors for lower payments and interest rates requiring one (more manageable) large payment each month. You can also pay additional lump sums. Fees for this service are usually very low, $5-$15 per month. Some non-profits offer this service together with financial literacy. Generally expect to be out of debt within 5 years or less. Using a debt management company does not hurt your credit score.
4. Beware of debt relief agencies: They collect most of their money off you in the first 6 months. You make one payment each month, and their fees are extremely high. They often keep your money for 6 months or more and then bargain with creditors to accept a third or half the balance due.You may receive calls from creditors and threats of legal action within this time period. The debt relief agency will advise you to call creditors only if you get hit with a summons. This method hurts your credit score and you may still owe income tax on the difference between the amount you pay and owe.

5. File Bankruptcy: This is an extreme measure. You may be able to keep your retirement account and home if you can still make mortgage payments. It stays on your credit history seven years, requiring you to rebuild your credit from scratch.

Tips

• Place credit cards in a jug of water in the freezer to limit use accordingly
• Record all expenditure versus income
• Distinguish between wants and needs
• Plan a budget and stick to it—realize budgeting is a lifestyle much like healthy eating/exercise, not a quick fix
• Pay cash where possible (or debit card) keep debt low where you can pay off balance every month—or better yet, do not incur debt at all. Keep high capacity on credit cards—aim for 20 percent balance maximum at any time. Do not close them unless you are paying an annual fee.
• Don’t spend what you don’t have
• Borrow, share, recycle, cut coupons
• Utilize free facilities—days at the museum, art museum, parks, etc.

Useful Resources

• Linda Hicks Linda.Hicks@premiermembers.org—free advice/counseling
• Your local credit union or bank
• Consumer Credit Counseling Service—CCCS.org
• MPoweredColorado.org
• Check out local free workshops/presentations and online articles

*Statistics from Infowars.com “Debt Slavery: 30 Facts About Debt In America That Will Blow Your Mind

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