There’s a reason why it’s called "drowning in debt."
When you feel as if you’ll never pay off your mountain of loans or credit card bills, it can be hard to see a way out.
Americans have been consistently trimming their debt since the 2008 financial crisis, but those balances have been edging up again in recent months.
According to the latest data from the Federal Reserve, consumer credit broke a record $3 trillion in the second quarter of this year, driven largely by increases in borrowing for student and car loans. Americans also remain saddled with high levels of credit card debt—to the tune of more than $15,000, on average, among indebted households.
If money problems are keeping you awake at night, you might consider contacting a debt counselor, who can help prioritize your payments and create an action plan for getting back in the black.
Sherry Tetreault of Clearpoint Credit Counseling Solutions, who has been a debt counselor for nearly 14 years, recently spoke with LearnVest to explain how consumers can benefit from such professional advice.
LearnVest: What does a debt counselor do?
Sherry Tetreault: Our number-one goal is to understand what a consumer’s number-one financial goal is, so we can empower them to resolve the issue and stay focused. The first thing we ask is what prompted them to contact us. In posing these questions, we not only listen to the words they are saying, but the way they are saying them. Often, the tone of their voice or their body language reveals so much more about what is keeping them up at night. This helps us understand what they want to see accomplished. Our goal is not to steer them in any one direction, but to give them unbiased information. Their biggest problem is often a fear of the unknown—of being unaware of what their options are.
What’s the most common money issue that you encounter?
As a rule, it's credit card or unsecured debt—whether that’s a personal loan or one through a finance company. Maybe they're getting collection calls or maybe they aren’t yet behind, but are worried about the volume that they owe.
Why might someone consider debt counseling?
People start to realize that they can’t make a payment on a debt or that the money coming through the door isn't enough to take care of the expenses walking out the door. But it affects everyone differently: I’ve talked to people who owe $50,000 in credit card debt and were not at all concerned. And I’ve talked to individuals who owe $3,000 in credit card debt and they can’t sleep at night.
What can you expect from a session with a debt counselor?
We explain who we are, and that the information they provide is protected, which helps them open up. Then we walk through a person’s specific situation: Are they employed full-time? Do they work multiple jobs? How many people in the household are working? Once that's done, we create an action plan, involving them in the process of accomplishing their goals.
I always have such admiration for any individual who has the courage to pick up the phone and call us. Because that’s really hard. I want consumers to know that when they call us, there is a person on the other end of the phone who does care about them—and may have once been in the same situation.
How much debt is too much?
A good rule of thumb with mortgages or renting is that payments should not exceed more than 31% of your gross income. (Here at LearnVest, we typically recommend keeping this expense below 28%.) When you see someone over that threshold, it often helps you to understand how the debt came about.
And if you open up a credit card, pay it off at the end of the month. If you can’t do that, then figure out what a purchase is going to cost you if you're going to pay interest. You certainly don’t want to have more than 19% of your gross income going to debt because that’s 50% of your gross income walking out the door. When you factor in taxes, insurance and retirement, you have to ask yourself if you are mostly working just to pay off debt.
Note: According to LearnVest's 50/20/30 rule, you want 20% of your net income to go toward financial priorities, including debt payments. But if debt payments take up 20% on their own, you need to be putting more of your net income toward your financial priorities. This way, you can pay off debt, while also building an emergency fund and saving for retirement and other goals.
Which debts should consumers typically tackle first?
Obviously, the roof over the person’s head—whether it’s a mortgage payment or rent—needs to be the top priority. The next is transportation: If you need that car to get back and forth to work so that you can earn a paycheck or have health insurance, that’s secured debt. The next thing is utilities, followed by food and medical needs. Once those things are taken care of, focus on the credit card accounts.
RELATED: Which Debts to Pay Off First?
What's a debt management plan, and how does it work?
The consumer and the creditors come together through an agency, such as Clearpoint Credit Counseling Solutions, and collaborate on a plan in which the creditors may be willing to grant some concessions. Maybe they'll reduce the interest rate significantly or, in some cases, waive it. Maybe they will stop charging late fees.
With a Clearpoint debt management plan, the consumer makes one payment, and we pay the creditors. The consumers receive letters as proof that the creditors are cooperating and that the monthly payments are being applied.
In many cases, since the creditors and consumer have worked together successfully, a creditor might come back to the consumer at the end of the program and say, ‘We want you back.’ And not because they want them to rack up a bunch of new debt, but because the consumer has made a responsible effort to get the debts paid off.
What's one of the most important services that a debt counselor can provide?
Creating a budget. I actually like to use the term spending plan because there are certain words in the English language—like budget and diet—that have a negative feel, as if we are saying no to ourselves. Spending plan sounds more positive, like we are in control.
We discuss various options: It could be a bundling plan for their internet, cell phones and TV, or programs that could help with utility and electric bills. We talk about groceries and bundling insurance plans. We also make a list of their assets to show them that they have also made good decisions. Basically, we show them that, by making a few tweaks here and there, they may be able to save, say, $50 a month. That’s $600 a year.
What is your advice to someone with a lot of student loan debt?
One of the things that we see most often [with student loan debt] is that people bury their heads in the sand. They defer, defer, defer. So we help them understand the volume of debt that they owe, and that they really need to re-examine their repayment options.
Very often, this is debt to the government, so it isn’t treated like credit card debt or mortgage debt. With the government, you can see your wages, bank accounts or tax refunds garnished. If someone is making payments, we ask whether they are making interest-only payments to see if their balance is going anywhere.
How can people avoid building up "bad" debt?
I'm constantly surprised by the number of consumers who don’t balance their bank accounts. They say, "Well, I don’t write checks." But they use a debit card. So get a check register! The banks hand them out left and right. Or use Quicken. Just make sure you know where your money is going. And be aware of what your bank is charging in fees.
Second: Track your spending. I tell my clients, for the next seven days, don’t change anything about the way you are spending, but do write down what you spend. In the vast majority of cases, within five days, that consumer has started making changes. When we write it down, we acknowledge what we’re spending, and we start reeling it in.
Also, make a spending and savings plan—and look at it at least every month. Your budget is not going to be the same in January as it will be in August. All you are doing is exerting control over your financial life. Knowledge is power.
LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc. that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment, legal or tax planning advice. Please consult a financial adviser, attorney or tax specialist for advice specific to your financial situation. The person interviewed in this piece is not a client of and is not affiliated with LearnVest Planning Services. LearnVest Planning Services and any third-parties listed, discussed, identified or otherwise appearing herein are separate and unaffiliated and are not responsible for each other’s products, services or policies.