The answer is…Yes, it can be, but it does not have to be.
If you are in debt, you are not alone.
According to 2022 consumer debt statistics and the Federal Reserve, debt among Americans has risen about 6.14 percent annually, hitting $4.4 trillion in January 2022. Americans owe almost 10 percent of their disposable income, have an average debt (per U.S. adult) of $58,604, and 77% of American households have at least some type of debt.
So, now, what do we do?
- We learn about debt.
- We learn how to pay off debt.
- We learn not to be scammed by debt.
There is an old proverb that states, “The borrower is a slave to the lender.” For the many people who are in debt, this statement is fully appreciated and understood. Debt can make you feel like you have no way out, but there is always a way out.
What is Debt?
First, let’s talk about debt. In a nutshell, debt is owing money to an individual, company, or organization for any reason. Owing money – is debt. Most debt includes mortgages, car loans, student loans, and credit card debt. If you have debt, you have more than likely agreed on repayment terms. Those terms include specific payments at specific periods until the debt is paid off—typically with interest (the extra cost the lender charges you for borrowing their money). You borrowed it; now you have to pay it back.
Not all debt is not bad.
For most Americans, owning a house requires a mortgage – therefore, going into debt. A new home does not mean you need to be tied to a specific lender or pay too much. There are more options than you think. AODFCU has a mortgage department that can walk you through your options to ensure you are not overextended or paying too high of interest.
Owning a car, in most cases, requires a loan – therefore, going into debt. Picking the right vehicle for your budget can lower your debt and save you money. A new fancy car may appeal to you, but look at the overall cost, such as tag, title, insurance, and interest being paid over the entirety of the loan, so that you can make the best decision. AODFCU’s BLOG regarding buying the right car for you and your budget can give you some good pointers when deciding. Take the time to read the blog and contact our specialist for more information.
Credit cards are seen as ALMOST a necessity in today’s society. But again, it is essential to read all the fine print, understand precisely what you are signing and seek other options besides high-interest credit cards. Having a credit card is not the problem; racking up the card and paying the high interest is the problem.
Student loans are needed for many Americans wanting to further their education. Student loans are only good if the student fully understands the loan. Interest rates, payment terms, and other factors can make huge differences in the actual amount being paid to further one’s education. There are many options for student loans – look into what is available and let us know if you need more guidance.
We can not emphasize enough doing research and understanding exactly what you are getting into when it comes to debt. Debt is not all bad, but it must be understood and respected.
How to Pay off Debt
Now, let’s talk about how to get out of debt and stay out of debt.
Paying off credit cards. A lure or temptation for getting into debt is credit cards. Credit cards are easy, fun, and can even help you raise your credit score, but you need to be a wise credit card owner. Average credit card interest rates were 16.3% at the start of 2022, then jumped to 19.6% at the year’s close, and experts say they are continuing to climb. Having a credit card is not necessarily bad, but the extreme interest rate can severely affect your finances and cause you much stress.
- Don’t do it – pay more! When your monthly statement arrives, you may want to pay the minimum amount due, but that is not a good idea. You must pay off your credit card as soon as possible. It can take years, even decades, depending on the interest rate, to pay off high balances. Pay the balance in full every month, or at the very least, try to pay more than the minimum amount.
- Pick the highest interest rate card – If you can’t pay off your balance every month, determine which cards have the highest interest rates and try to pay those off first.
Paying off credit cards saves money and helps build up your credit score. Lenders use this score or number to determine the interest rate you will pay on your loan. It all works together, so pay attention to each credit card’s details and ensure the benefits do not become burdensome.
Another option is debt consolidation. Taking your current debt and consolidating it for a lower payment and possibly a shorter term. Debt consolidation loans are typically used for unsecured debts, for example, personal loans, credit cards, and student loans. Instead of dealing with multiple bills, you have the ability to manage one consolidated bill.
Different types of consolidated loans include:
- Balance Transfer Cards – this may be a good option for lowering your interest and being able to apply more money to your balance. But there are some things to be aware of and consider, such as the initial interest rate may go up, balance transfers can cost money, and it could hurt your credit score.
- Unsecured Personal Loan – This option allows you to get a loan without collateral, set up installment payments, and raise your credit score. The downside is that you may have to pay a higher interest rate, pay it off sooner, and other fees may apply.
- 401(k) loan – This may be a good option if available because it lowers interest rates, has no minimum credit requirements, and offers automatic payroll deductions for payments. The negatives can be no earned investment gains, risk of early payback, and early distribution and tax liabilities.
As with anything, do the needed research to make the best financial decision for you and your family.
Don’t Get Scammed
Be on the lookout for scammers. Sadly, groups are targeting people offering “for sure” ways of getting out of debt under the disguise of Debt Settlement and Debt Elimination.
Debt Settlement Programs – Programs that offer ways to get credit cards paid off with “guarantees” to settle all your credit card debts for 30 to 60 percent of the amount you owe. These companies say they can lower your interest rate or the amount you owe, all for a nominal fee. There are reputable companies that can help but make sure you are not part of a fraudulent company making offers they can not provide or collecting fees from before they settle any of your debts.
The Federal Trade Commission’s Telemarketing Sales Rule prohibits companies that sell debt settlement and other debt relief services on the phone from charging a fee before they settle or reduce your debt. Before you enroll in a debt settlement program:
- Do your homework.
- Enter the name of the company name with the word “complaints” into a search engine.
- Read what others have said about the companies you’re considering, including whether they are involved in a lawsuit with any state or federal regulators for engaging in deceptive or unfair practices.
Advance Fee Loans – Companies guarantee you a loan if you pay them a fee in advance. The fee may range from $100 to several hundred dollars. Resist the temptation to follow up on these advance-fee loan guarantees. It’s true that many legitimate creditors offer extensions of credit through telemarketing and require an application or appraisal fee in advance. But legitimate creditors never guarantee that you will get the loan – or even represent that a loan is likely. Under the FTC’s Telemarketing Sales Rule, a seller or telemarketer who guarantees or represents a high likelihood of your getting a loan or some other extension of credit may not ask for — or accept — payment until you get the loan.
Credit Repair – Companies appeal to people with poor credit histories, promising to clean up their credit reports for a fee. But anything these companies can do for you for a fee, you can do yourself — for free. You have the right to correct inaccurate information in your file, but no one — regardless of their claims — can remove accurate negative information from your credit report. Only time and a conscientious effort to repay your debts will improve your credit report, and … Federal law bans these companies from charging you a fee until the services are entirely performed.
Debt or owing money can make you feel overwhelmed and out of control, but this does not have to be the case. Doing research and being aware of your options can keep you out of debt and in control. In December, we blogged about the dreaded “B” word – Budget. It is not a topic most people want to discuss, much less actively pursue. But learning to budget and doing your research is crucial to getting out of debt and staying out of debt. Take the steps needed to ensure your financial well-being. Wise decisions with debt are good for your health and finances. At AODFCU, we are a family and want to make sure our family stays healthy, including not being “slaves” to our lenders. Reach out to us with any questions.
*Certain Restrictions May Apply.
For more information, visit MyCredit