Paying off debt when inflation is high
BALTIMORE — As inflation drives up the cost of everyday items, many consumers are struggling with debt.
A Nerdwallet study found that Americans have an average credit card balance of $6,000.
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For Jane Spence and her husband, they owed more than $100,000 in credit card debt.
“We’ve been fighting for many years,” said Spence, whose income was suddenly cut by 60 percent. Also, his company stopped offering health insurance, and medical expenses caused more financial strain.
The Spences refinanced their home mortgage several times but couldn’t seem to catch up.
“We ended up using our 401K. I used some of mine and he used all of his and that hurt us a lot,” Spence said.
The couple considered filing for bankruptcy, but then learned of debt management plans.
“In a debt-management program, creditors agree to lower interest rates to about 6.4% and get people on track to be debt-free within about four years, on average,” said Thomas Nitzsche, Money’s director of media and branding International Management (MMI).
MMI managed the Spence’s plan. Your eight credit cards have been consolidated into one account. MMI negotiated the interest rate down to 7 percent, and the Spences paid $1,900 a month, which helped them pay off all their debts.
“$106,000 total,” Spence told WMAR-2 News Mallory Sofastaii. “In less than five years.”
There’s a kind of catch. You need to close these credit card accounts so you don’t get into debt during the process. If you fall into old habits, you risk your creditors dropping out of the program.
The credit counseling center is also remunerated.
“On average, customer fees are about $24 per month, there’s a nominal startup fee averaging $35,” Nitzsche said.
These agencies also receive payments from creditors.
“A so-called ‘fair share payment’. Basically, in exchange for managing the debt management program, the creditor also gets a percentage, so both parties have a vested interest in making sure it succeeds,” Nitzsche added.
Debt Management Plans (DMP) can help consumers save thousands of dollars on credit card interest.
For example, if someone owes $18,000 and pays their lender the same amount each month as they would at a DMP, it would potentially cost them $27,000 more over time.
However, this plan requires discipline.
Consumers get a new loan to consolidate cards with high interest rates, but interest rates vary based on credit history. The lower your score, the higher the rate.
In debt settlement, a company negotiates the amount you owe. However, your balance could go down while you withhold payments and hope for a settlement. You also risk being sued by the creditor.
In the end there is bankruptcy. You apply to a court for payment of your debt. This could have a long-term impact on your finances and cost you a fortune.
While neither might seem like a great option, they do offer consumers a way out that is overpowering them.
“I think it really helped us a lot. We’ve gotten used to budgeting our money a little better,” Spence said.
“If we can help people get those interest rates and payments on credit cards, it frees up money in their budgets that they can use for their real basic needs,” Nitzsche said.
Debt management plans only cover unsecured debt like credit cards and personal loans, not mortgages or student loans.
And you don’t need a credit counselor to lower your interest rates. Call your lender and see if they’re willing to work with you, and then also speak to an advisor to compare the interest rate they’re offering.
Consumers should work with nonprofit credit counseling agencies that are accredited by the National Foundation for Credit Counseling (NFCC).
Click here to find an NFCC agency near you.