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Dealing With A Debt Overload

According to the Federal Reserve Bank of New York, US household debt surged to a record $14.3 trillion in the third quarter of 2020. While the majority of that load is mortgage debt, Americans are still burdened with student loan, auto loan and credit card obligations that continue to place stress on family budgets, a problem exacerbated by the extraordinary economic hardships from the pandemic.

If you are looking for help on how to tackle a mountain of debt, here are a few tips to get started.

First and perhaps most important is to establish a budget. It need not be overly detailed, but you need a baseline to help determine where the leakage is coming from. Begin by writing down every expenditure for the past three months and comparing with your cash inflows. At that point it will be easier to identify potential targets for cutting back and to stop digging the hold deeper. You may be surprised at how much little things like a trip to Starbucks add up over a year. And by all means, curtail any non-essential additions to those credit cards. There are numerous budgeting apps on the web that can lend a hand if you don’t know where to start or just want to make the process more fun.

Next, establish a plan to begin attacking your debt pile. The most logical and cost-effective method is often referred to as a “debt avalanche”, in which you make the minimum payment to all accounts but the one with the highest interest rate, and then dedicate as much as possible each month to knocking that one off. Proceeding in this manner saves you the most in interest over time.

Alternatively, some people have found success with the less efficient but psychologically rewarding “snowball” plan, under which you attack the smallest obligation first (maintaining the minimum payment on all others). The theory here is to gain momentum earlier like a snowball rolling downhill. In the long run, the most important consideration is which method you are most likely to stick with.

Central to a concerted debt paydown plan is examining lifestyle decisions and setting priorities. As you restructure your spending, also take a hard look at what you currently own that you might sell. Those dusty golf clubs could mean another couple hundred bucks off of the Visa balance.

If much of your non-mortgage debt is in credit cards, you might consider shopping around for available balance transfer offers. Many card companies are again advertising zero annual fee balance transfer offers with lower interest rates. In some cases, and depending on transfer fees, these offers can be worth considering if the interest differential is significant. Just be sure to understand the costs and especially the terms. These cards often carry substantial penalty rates if the balance falls past due.

If the load seems to great or too overwhelming, it’s probably time to seek some advice from a certified credit counselor. There are many not-for-profit organizations that specialize in helping families and individuals tackle their debt with coaching, budgeting help and even structured repayment plans and arrangements with creditors. But be aware that there are many unsavory players lurking who promise the undeliverable and exist only to separate you from more of your money. Make sure the agency is accredited by the National Foundation for Credit Counseling (NFCC). You can begin your search at NFCC.org.

There are dozens of helpful resources today on the internet to help you tackle debt and find encouraging words from others who have successfully escaped the cycle.  A few starting places include ConsumerFinance.gov, ConsumerCredit.org, USA.Gov/debt and NerdWallet.com. Your local bank or credit union website probably also has useful information.

Carrying debt from year to year is a heavy burden. But with commitment, effort and time, that burden can be lightened.

Christopher A. Hopkins, CFA

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