As the economy slowly improves, Americans are racking up more debt. And experts say they often make big mistakes when trying to shed that debt and get out of the red.
According to the latest data from the Federal Reserve, the total outstanding revolving credit card debt in the U.S. reached $873.1 billion at the end of June 2014 up from $861.5 billion in the first quarter of 2014. The average American household holds around $15,480 in credit card debt, $156,474 in mortgage debt and $33,424 in student loan debt. All told, Americans owe around $11.74 trillion in debt, up 5% from last year.
People try to get out of debt in many ways, most of them mistakes. Many take out a short term loan or transfer a balance to a new zero-interest credit card but are not able to pay off the balance should the higher interest rate kick in. Others borrow from their 401(k) retirement accounts, also not a very good idea. And then there are those that rotate paying creditors, paying one creditor while holding off paying another. This never works out positively.
Besides declaring bankruptcy, there are a few ways to pay off debts. Focus on paying off the credit card with the highest interest rate first, while making smaller or even just required minimum payments on their other debt accounts. Others choose to pay off the lowest dollar amount on each credit card first because it gives them a greater sense of achievement.
Never miss a payment. Credit cards and car payments may be overwhelming but missing even one payments results in a report to all the credit unions and endangers any future loans. Even paying back less than the minimum required indicates your willingness to continue to pay off your debt and will keep you in good standing with the bank.
If you must seek help in credit management, make sure you approach the right service. Learn to distinguish between a “debt management” organization and a “debt settlement” company that offers legal and financial services. The former category includes non-profit organizations that belong to the National Foundation for Credit Counseling, while the latter is made up of for-profit companies.
The practices of debt settlement companies have frequently been the target of consumer complaints and warnings from regulators. Confusing the two could cost thousands of dollars. Debt management programs aren’t always above board either. When you enter a debt management plan, that fact can be reported to credit agencies, hurting your credit score. But when payments are made on time through a bona fide program that helps to rebuild credit scores.
Student-debt holders who work in public service, for the government or a non-profit, or who want such a job, may be eligible for debt forgiveness. Under the government’s Public Service Loan Forgiveness Program, borrowers in public service jobs may qualify for forgiveness of the remaining balance of their Direct Loans after making 120 qualifying payments on those loans.
Try refinancing your debt to get lower interest rates. Most mortgages have an interest rate of 5% or less, while student loan debt might be closer to 8%, auto loans could be as high as 7% and credit card debt could range from the teens to 20% or more. It might be worth paying off hefty credit card bills or unexpected medical debt by borrowing money against your home through a home-equity loan. But this should be done only if you’re 100% sure you’re not putting your home at risk.