Over half of Americans (53%) surveyed in 2019 say that debt reduction is one of their top priorities. That same survey showed that nearly a quarter (23%) say they have no debt. Millennials seem to be a debt-averse generation who view debt as an unnecessary burden and one they're determined not to pick up.
Mortgages and student loan debts are easily the two biggest financial obligations we carry. These types of debt vary by generation but, surprisingly, not by a lot. Baby Boomers have an average debt of $186,506.00, while Generation X owes an average of $226,238.00 and Millennials an average of $214,112.00.
Nitro surveyed 1,000 Americans and looked at how debt — or the absence of debt — impacts their quality of life. They found that the vast majority of them carry some form of debt, with credit card debt being the most common type of debt they carry. Seventy-five percent owed in the neighborhood of $7,000 in credit card commitments.
Debt can quickly spiral out of control, and if you're looking to get organized and start eliminating these outstanding payments, you'll have to put together a plan.
Benjamin Moore famously said:
"If you fail to plan, you are planning to fail."
That's very true when it comes to dealing with your debt. Without a plan, you won't be able to anticipate what risks and problems you may encounter along the way, and you'll likely waste time trying to solve challenges you didn't anticipate.
Problem-solving often costs money, so without a plan, you'll work against your best interests by failing to create and stick to a plan.
Here's the outline of a doable four-part plan:
I'm going to jump to Step 2 first and then circle around and fill in the other steps after. I want to get it out of the way before moving on to the other steps because Step 2 contains what might trigger the most panic and anxiety.
When you're contacted about a debt you owe, you may hear from an in-house debt collector. If you're a few weeks or months behind on paying, your Walmart credit card company (for example) could contact you directly.
But once your debt is over a few months, the creditor (Walmart) may hire a collection agency to try to get the money owed, or they'll sell your debt to a collection agency. Still using Walmart as an example, they'll be guaranteed part payment — pennies on the dollar — of your original debt and then will write off the rest as a loss.
The result is that any outstanding long-term debt you owe is now controlled by a collection agency whose top priority is to get their investment money back, not care for your financial (or mental/emotional) well-being. As of June 27, 2022, the debt collection business is a multi-billion dollar industry.
While the Fair Debt Collection Practices says they can't do the following:
It's not uncommon for them to do so and even illegally threaten you with lawsuits to shock you into paying. There may be kind-hearted debt collection agencies who are filled with compassion for your financial situation, but they seem to be as rare as hen's teeth.
Before you think the only reasonable response to being contacted by a debt collection agency is to curl up under your covers, you'll be happy to hear that you have powerful and legal ways to deal with them.
First of all, never assume the collection agency is right about how much you owe or even if you owe them money. According to last year's Consumer Financial Protection Bureau (CFPB), about 70 million people heard from a debt collection agency and were told they owed them money.
Hold on to your hats here. More than half — 35+ million people said the collection agency was wrong. Not just wrong, but nearly half of those 35+ million people (17+/- million people said that someone else owed the money. Not them.
I hope this gives you some perspective if a debt collection agency comes looking for you.
Other reasons the 35- million were wrongly contacted included:
When over half of the calls are made by collection agencies at large, you should seriously procrastinate before hitting the panic button. Granted, you may not be one of the 35+ million people wrongly contacted, but there's a 50/50 chance you are.
And if you do owe money, you still need to take crucial steps before writing a check and sending it off. These steps ensure you don't pay money you never owed in the first place, you no longer owe because they waited too long, or you pay money for a full-on scam.
Although Google (and others who should know better) can use the terms "debt validation" and "debt verification" interchangeably, they're technically different types of letters with different purposes.
Under federal law, a debt collector must send you a debt validation letter within five days of contacting you. They can't simply call and inform you about the monies you owe. Although they are obligated to send it to you, you may need to request it when it comes to this type of letter. And that request letter from you is called a debt verification letter.
If a collection agency's first contact with you is via a phone call, don't give them any personal or financial information until you have confirmed it's a legitimate debt collection agency. Better yet, insist they contact you in writing. Politely give them your mailing address and end the call. While they might not be scammers, they could be, and you would have no way of knowing during the course of a call.
A verification letter is a request to the collections agency to prove that you actually owe the money a collector claims.
This letter should ask the following:
Once they receive your debt verification letter, they must (again by law) stop all forms of communication with you until they have sent you their debt validation letter. They may not call you, write you a letter or report you to credit bureaus and wreak your credit rating.
If you get a debt validation letter or you ask for one, it needs to include the following information:
The Consumer Financial Protection Bureau (CFPB) is on your side, and they've drafted five specific sample letters you can use when it comes to dealing with debt collectors.
I can't give you better samples than the ones they provide for free:
This site also stresses that you don't procrastinate sending your debt verification letter. Thirty days seems to be the timeline the government typically sets for both you and the debt collector to respond to each other.
Please don't use the sample letters as legal advice, and if you're being sued or think you might be sued, they recommend you contact a lawyer and give some helpful advice on how to do so.
Hopefully, the information about debt collection agencies and how to deal with them has reduced any potential panic or anxiety. You may owe money, but it's good to know you have the power of the US government behind you to make sure you're not bullied or harassed over it.
The first step in your plan should be to figure out exactly how much you owe. Not just the loan amount but also the interest rate, term, and any other relevant details. Double-check that you haven't missed any debts you owe by looking at your credit report.
You can check this report every week for free through AnnualCreditReport.com until April 20 of next year. After that, you can check it for free once a year. Make sure to check from all three credit bureaus: Equifax, Experian, and TransUnion. Some lenders only report credit activity on one or two, so checking all three ensures you won't miss any important information.
While you may think this step is out of reach, once you understand how much money you'll save in interest, you might think it's worth the extra effort.
If you carry a $7,000 credit card balance (like 75% of all Americans) and the interest rate on the card is 17% APR, you'll likely need to make at least a $225 minimum payment. If you only make this minimum payment, it will take you almost 42 months to pay off your card. Assuming you don't add any more debt to the account.
You will have paid more than $2,295 in interest over the four years at this rate. Using this credit card payoff calculator, you can plug in the amount of alternate monthly payments and see how much quicker you can pay off the amount owed and what the total interest cost will be to do so.
Two creative ways I've found to deal with debt are to take any money you get in the form of a tax refund, a birthday present, a stimulus check, or an inheritance and apply it against your loans. In order not to be a total killjoy, even if you put a portion (the more, the better) of this "windfall" money towards your loan, you can get free of debt sooner and save the amount of interest you would have accrued.
The other creative way to get out of debt faster is to spend less than you earn. Or earn more than you spend. Either way works.
Cut your budget by tightening your belt a bit. A great way to do this is to write down every single item you spend money on and then arrange them in order of importance. Paying the mortgage or rent will typically be at the top of the list, and a new pair of shoes will be further down the list. Decide if the item is a need or a want, and see where you can do without a "want" to save money.
Pick up a side hustle, a few extra shifts, or a part-time job and dedicate this money to paying off your debts.
The less debt you carry, the better your credit. The better your credit, the more opportunities and freedoms you will have to use your credit muscle for your good.