Life happens, and along with it often comes debt…and you know what? That's okay! Whether you have debt in the form of student loans, medical bills, an emergency that had to be financed, or too much spent on credit cards - we have all had our share of debt to repay.
Having debt you owe is fine, but it's important to ensure you have the resources you need to plan how to pay the debt off. To help us all, I asked our AVP Lending Solutions and Certified Credit Union Financial Counselor, Nick Jones, some questions about having debt, consolidating/paying off debt, and getting through hardship.
What is your best advice for someone who is having a hard time paying their debts?
Talk to your creditors. Most creditors will work with you if you are struggling to repay everything. Some people may find it embarrassing that they cannot keep up with their payments, but most people go through a tough time, they just don’t talk about it openly. Speaking honestly with your creditors about your situation and how you got there is the best way to work with them to find a way out.
If someone is in over their head, what is the best option for them?
Take a deep breath. There is almost always a way out of whatever financial situation you find yourself in. While it might not be quick, or easy, there are tons of options to get your debt paid down, get an emergency fund, and aim for your financial goals.
If someone is just getting by paycheck to paycheck, how can they save money?
Most people live paycheck to paycheck, but the good news is that most people can save as well. People believe you shouldn’t put money in savings if you still have debt, but that isn’t always the best choice. If an emergency came up, and you had no savings, you would need to either borrow money or put it on a credit card, perpetuating the debt cycle. If you put some towards saving and some toward debt, you will be able to hit two goals and emerge in a much better position.
If you make putting money into your savings a requirement, like any utility bill you have, you can train yourself to save more. It doesn’t need to be $100 a paycheck. Take $5, $10 or $20 every paycheck, and put it into your savings account. $20 biweekly is $520 a year. If you get a raise or pay off a debt, increase the amount going to your savings. Once you hit your goal, start putting that savings money toward other debt, investments, or other savings, and you’ll be well on your way.
What is the best way to pay down your debt?
There is no ‘best way’, it truly depends on your circumstances. The first thing you want to do is insure you have all your minimum payments covered. Once all your bills are taken care of, look at what is left at the end of the month. If there isn’t anything left over, it might be time to look at reducing costs. While you shouldn’t have to live on rice cakes every day, limiting your expenses on entertainment and going out to eat can help cut some costs.
Some people believe you should pay as much as you can to your high interest debt. The higher the interest, the more money you’ll pay for the debt. If you pay extra to pay it off sooner, you’ll save money. This works well if you’re meeting your monthly obligations with little to no stress and have some extra funds at the end of every month. If you’re really stretching your funds, paying extra on the smallest balances can free up some minimum payments, as long as you don’t charge it back up again.
How does debt consolidation help pay off debt?
The typical goal of debt consolidation is combining some debts at a lower rate and/or lower monthly payment, to save the total amount you must repay, or to lower your monthly payments to make things easier. Debt consolidation is a powerful tool, but it needs to be used wisely. Many people make the mistake of charging up their credit cards when they’ve just consolidated into another loan. Not only does this increase your overall debt, but it also stops saving you money each month, and now you’re further in the hole.
A $5,000 credit card balance, at 14% interest would take 76 months, or more than 6 years, of paying $100 a month, with no new charges or late fees, to pay off, and repaying over $2500 in interest. If you consolidated into a five-year loan, at 9%, you would pay just over $100 a month, and a total of $1,225 in interest. That’s a savings of close to $2,675 between the payments and interest.
That’s a huge amount of savings. The credit union can help with this, right?
Right! Carolina Trust offers a 0% balance transfer option for 12 months, so moving some of your high interest debt over is a breeze. We also have some awesome rates on our personal loans for debt consolidation, as low as 8.75%. Our MSRs and other lenders are available for any questions for your specific situation, so I recommend reaching out to someone today!
