16 April 2024

Effective Debt Management

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Debt is high, and savings are low.  

Indeed, total household debt rose to an all-time high of $13.15 trillion at year-end 2017, according to the Federal Reserve Bank of New York's Center for Microeconomic Data.

And, as of year-end 2017, some 4.7% of outstanding debt was in some stage of delinquency. Of the $619 billion of debt that is delinquent, the Federal Reserve Bank of New York noted that $406 billion is seriously delinquent — at least 90 days late or “severely derogatory.”

Meanwhile, the U.S. household saving rate is floating around 3.4%, well below its average of 8.26% from 1959 until 2018. That's also a dramatic drop from its all-time high of 17% in May of 1975 and not much above its record low of 1.90% in July of 2005.

So, what might you do if you’re burdened with debt?  Here are some effective ways to drop debt and bolster savings:

Tap into the power of websites and apps 

Linda Jacob, author of No More Paycheck to Paycheck recommends PowerPay, a free website designed by Utah State University Extension. PowerPay helps you develop a personalized, self-directed debt-elimination plan, says Jacob, who is also a financial counselor with Consumer Credit of Des Moines. 

A user enters debt balance, the minimum payment due and interest rate. The site "will then calculate how quickly you can pay off your debt, and will even build you a calendar so you know how much to pay on each debt, each month,” says Jacob.  
 

There are savings-related apps, such as Even, which allows you to set aside money from each paycheck to pay bills each month, says Kristen Holt, CEO of credit counseling, debt management and financial education services concern GreenPath Financial Wellness.   

"For example, if most of your bills are due in the second half of the month, these apps will hold aside enough money from your first paycheck of the month so you don’t have to use your whole second paycheck for bills," she says. "This leaves you with a more consistent amount of money left to spend after every paycheck." 

Divide and conquer 

Holt also suggests setting up automatic drafts from a main checking account into multiple “savings” accounts, titling each account separately (travel, credit card debt, utilities and the like) and only pay bills from the titled accounts.

“If you are paid 26 times/year and do this every paycheck, you will have extra to go towards paying down debt faster," she says.  

Plan your payments strategically 

Holt recommends paying off the smallest balance first.

“Pay the minimum on your other accounts while putting any extra funds towards this one account,” she says. 

“This keeps you motivated. Then, once you pay off this smaller balance you move to the next debt, and repeat until all of the accounts are paid.”

Another version of this strategy (sometimes called "snowballing"): pay down the balance with the highest interest rate first, while paying the minimum on the others. Vertex42.com, a company that provides free and low-priced spreadsheet templates, has a free spreadsheet that can help you manage this.

Capitalize on credit card rewards 

Hold says to use those credit cards rewards to pay off a credit card balance rather than splurging on something else.

"Rather than cashing out rewards on a gift card or transferring the rewards balance into your bank account, many reward programs will allow you to apply your points towards your credit card balance," she says. 

Use credit cards wisely  

Seek credit cards with the best interest rate, so more of your payment go to the principal and less is wasted on interest, says Holt.  

She recommends finding zero-interest balance-transfer offers. “Determine how many months the offer is valid and subtract a month, then divide your total balance into manageable monthly payments and pay down the debt before the offer expires,” she says. Then, remove the credit card from your wallet so you're not tempted to use it, she says.

April Lewis-Parks, director of education and corporate communications at credit-counseling organization Consolidated Credit, says to use a credit card balance transfer “if someone has a limited amount of debt to repay – less than $5,000 and has a good credit score of 650 and above." 

Debt-management plan vs. a debt-consolidation loan 

Lewis-Parks says a debt-management plan, also known as a DMP, is a repayment plan that you can set up through a credit counseling agency.

"It basically rolls multiple debts into a single consolidated repayment schedule," she says. "The credit counselor helps you find a payment that works for your budget. Then they negotiate with your creditors to reduce or eliminate your interest rate, as well as stop any future penalties."  
 

By contrast, Lewis-Parks says debt consolidation is a financial process where you combine multiple debts into a single monthly payment. There are two basic ways to do this, she says:  

  • Take out a personal debt-consolidation loan
  • Execute a debt transfer using a balance transfer credit card

If someone owes more than $10,000, he or she is usually better off with a personal debt-consolidation loan (depends on your credit score). If the credit score is below 650, then a debt-management plan through a non-profit agency may be the best solution for paying off debt quickly and efficiently, says Lewis-Parks.

With debt consolidation and debt transfer, "you need good credit in order to qualify for the lowest interest rate possible," she says. "Reducing the interest rate makes it easier to pay off your debt faster. So, even if you could qualify for a personal loan with bad credit, the rate you receive probably won’t help. That’s why these solutions really only work if you have a good credit score."

See what you can sell    

“I’ll ask clients if they have an asset they can sell in order to pay the debt,” says Jacob. “I’ve had clients sell a boat, snowmobiles, their kid’s clothes. I even had a client in Nashville who sold a fiddle and was able to pay off all of his debt.”

The end game 

For any type of debt elimination, the consumer’s ultimate goal should be to ensure that the solution they use doesn’t put them in a weaker financial position overall, says Lewis-Parks.

“For instance, using a home-equity loan to pay off credit card debt is usually not advisable because it effectively converts unsecured debt to secured,” she says. “If the borrower fails to pay off the home-equity loan, now they face higher risk due to the threat of foreclosure. The same is true of using retirement income to pay off debt. This decreases long-term savings, putting the consumer in a weaker financial position than when they started.”

Click here for the original article from USA Today.

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