Dear Credible Money Coach,
I owe $9,000 on a truck and about $5,500 on credit cards and small loans. I also owe medical bills probably totaling about $5,000. I have been sending money here and there trying to pay all these bills off. How do I go about making up a plan to pay? My fear is I’ll never pay it off. How do I get myself out of this mess? What are the best ways, or companies to go to? — Gary
Hi Gary, and thanks for your question.
It may give you some comfort to know that you are not alone in struggling with debt — we get questions every week from people in exactly your situation.
Household debt has been a big problem in America for a while, and the pandemic didn’t help the problem get any better. In fact, consumer debt hit a new record last year, according to Experian. The average credit card balance is just over $5,300, and the average auto loan balance is nearly $20,000, according to the credit bureau’s data.
Based on the numbers you shared, your total non-housing debt is around $19,500. You’re absolutely right that inconsistent payments or only making minimum payments will make it difficult to pay off your debt. But with the right plan, you can definitely tackle it. So I commend you for reaching out for help.
Let’s start by giving you some ideas for where you can get help making a personalized debt-busting plan.
Where to get help making a plan
Reputable, nonprofit credit counselors can help you make a plan to manage your finances, create a budget and establish a plan for paying off your debt. They can help you decide if a debt management plan is right for you — and DMPs aren’t for everyone.
A credit counseling agency that’s on the up-and-up will provide you with free information about its services and how it works. It won’t require you to make any kind of payment or even ask you to share your personal information just to find out how the agency works. Even though they’re not-for-profit, a credit counselor may have fees, but they should clearly explain their fees upfront.
Tread carefully when looking for a credit counseling agency. Sadly, many individuals and companies who claim they’ll help you get out of debt are only in it to make money — and they could even make your situation worse. Stay away from these.
Start your search for a reputable credit counselor either with the U.S. Department of Justice’s list of approved credit counseling agencies or the National Federation for Credit Counseling.
Both the DOJ and the NFCC have searchable databases that can help you identify some credit counselors near you. You may also be able to find reputable credit counselors through a local university, military base, local housing authorities, a credit union or your local Cooperative Extension Service.
Before hiring any credit counselor, check with your state attorney general’s office, the Better Business Bureau or your local consumer protection agency to see if the counseling company has any complaints against it.
Run away if a counseling agency …
- Demands you pay upfront
- Pushes you toward a debt management plan without first looking at your whole financial situation
- Charges for educational materials
- Isn’t transparent about any fees it charges
- Guarantees it will get your debts forgiven
- Makes you feel pressured or uncomfortable in any way
Tips for tackling debt on your own
If you decide credit counseling isn’t for you — or if you know it’ll take a while to find the right counselor and you want to get started right away on your own — here are some steps you can take to start paying down that pile of debt.
- Get a clear picture of your total debt. Knowledge is power, and knowing exactly — to the dollar — how much debt you have can help you make a plan to pay it off.
- Consider the avalanche method. Using this strategy, you’ll make minimum payments on all your debts, then put extra toward the account with the highest interest rate — likely your credit cards. This approach minimizes the amount of interest you pay to get out of debt.
- Consider the snowball method. With this strategy, you again make minimum payments on all your debt but put extra toward paying off the smallest debt first — your medical bills. When those are paid off, you move on to the next smallest.
- Turn it into cheaper debt. Credit card debt can be very expensive. And if your loans are a few years old, chances are they’re at a higher interest rate than the current average on personal loans. You may be able to consolidate high-cost credit card debt and higher-interest loans into a lower-interest personal loan.
- Reach out to your creditors. Bill collectors aren’t famous for their compassion, but that said, many creditors realize that the pandemic has majorly hit many people in the wallet. It may be worth it to reach out to your creditors to see if you can negotiate a lower interest rate or get them to agree to settle the debt for less than the total amount you owe (this is particularly common with medical debt). Just be aware, this course could ding your credit score.
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About the author: Dan Roccato is a clinical professor of finance at University of San Diego School of Business, Credible Money Coach personal finance expert, a published author, and entrepreneur. He held leadership roles with Merrill Lynch and Morgan Stanley. He’s a noted expert in personal finance, global securities services and corporate stock options. You can find him on LinkedIn.