Let’s talk about debt!
Debt Awareness Week is March 21-27!
Credit can be a powerful tool to help us achieve our dreams — but, as with any power tool, there’s a lot that can go wrong. That’s why it’s important to know how to use it safely, and what to do if things start to get out of control.
Being in debt can be stressful, but in the United States it’s also very common: Roughly four out of five Americans owe money, with an average debt of nearly $93,000 apiece, according to a 2021 report by Bankrate®. That figure includes all types of debt, such credit cards, mortgages, student loans, auto loans and medical debt.
While too much of any type of debt can be problematic if it exceeds your ability to pay, it’s not necessarily a bad thing to be in debt. When done carefully and responsibly, borrowing money — also known as using credit — can help us achieve things that may otherwise be out of reach. For example, few people can afford to buy their first home without a mortgage, and few entrepreneurs make it big without a business loan.
A slippery slope
Problems tend to arise when debts become too large to manage and the borrower is unable to keep up with the payments. Unfortunately, this situation frequently triggers a snowball effect that becomes harder and harder to deal with as time goes on. That’s because there are several things that can go wrong, sometimes very quickly, when a borrower falls behind on their debt payments:
- Interest accumulates and is added to the debt — generating more interest.
- Late fees are added to the debt.
- Interest rates may increase due to late or missed payments
To make matters worse, increased debt and late or missed payments can take a toll on your credit score, which may drive your interest rates up further and compound the issue as time goes on. Even worse, if the debt is secured by an asset such as your home or your car, falling behind could mean you are at risk of losing them if you don’t address the problem head on.
What if I can’t pay?
If you start to fall behind on your payments, it can be tempting to simply ignore the problem — but don’t! That will only make it worse. Facing the situation right away can be scary and uncomfortable, but it will also give you your best chance to nip it in the bud. Even if you’ve already fallen behind, take steps sooner than later to minimize the impact and begin the process of getting out of debt. Your future self will thank you!
Start by making a list of what you owe and when your payments are due. Next, figure out how much you can afford to pay and decide which bills are your highest priority. Although it may seem counterintuitive, it’s often helpful to contact your creditors and let them know you’re having trouble making payment. In many cases, they may be willing to work with you to find a solution such as adjusting your payment schedule or interest rate, or making other accommodations to help you stay on track.
Struggling with payments? Get more tips from our blog post “What to Do if You Can’t Pay Your Bills.”
Bankrate® (Sept. 17, 2021). Average American Debt 2021. https://www.bankrate.com/personal-finance/debt/average-american-debt/
The information provided here is general in nature and may not apply to your specific situation.
