Interview with Rescue One Financial About Consumer Debt
Debt affects and untold number of Americans. Learn strategies you can use to create fiscal stability in your business and personal life.
Consumer debt is a complicated issue, and with ever-increasing consumer debt in tandem with rising average household income, the issue becomes even more difficult to understand. It’s important to understand the types of household debt that contribute to the national debt average, as well as how you can use them in your day to day to maintain healthy financial habits. With more and more consumers getting sucked into in unmanageable credit card debt, financial desperation often sets in and makes the cycle seem endless. Looming debt can seem like a frightening shadow haunting those who are caught up in it.
Some debt is due to necessary expenses such as medical costs. In fact, health expenses are growing faster than personal income. Nerdwallet’s study of information from the U.S. Census Bureau and the Bureau of Labor Statistics found that in the past decade, while medical costs increased by 33%, median earnings grew by only 30%. In the same Nerdwallet study, four out of five parents with children under the age of 18 have credit card debt in addition to the large amounts of medical debt. This compares with close to 58% of credit card debt holders who are not parents of young children. Even though expenses may be required, the negative results of using credit to pay for these large expenses can last a lifetime.
Debt relief agencies such as Rescue One Financial can help consumers pay off even seemingly hopeless amounts of debt. With professional guidance, those owing money on unsecured loans such as credit cards can experience the relief of paying off large debts in much less time than on their own. Rescue One Financial is an accredited business that offers debt resolution as well as a special debt management program for those who meet specific guidelines. We spoke with their experts about today’s consumer debt, and Rescue One Financial had numerous insights to share.
Q: Why do you think consumer debt is so high right now?
A: Consumer debt recently surpassed and all time high of $4 trillion for the first time in history. The number $4 trillion seems pretty frightening, but actually that number is considered very manageable as a consumer debt average once you factor in national population growth verses growth in consumer debt (mortgages, student loans, personal loans and credit card debt).
What’s most important for consumers to watch is their individual debt balance vs the national average, especially in terms of credit card debt, which tends to be the most damaging to financial health. According to the latest Experian data, the average American consumer has about $4,200 in credit card debt. If the debt load of an individual greatly surpasses this average, it might be time to start seriously considering options available to decrease their debt load.
Second only to defaulted debt, credit card debt is the most detrimental debt to overall financial health. Even if you make all your payments on time, a very high unsecured debt load can be the one thing standing in the way of achieving a great credit score. It is all too easy to fall into an endless cycle of making minimum payments, so it’s best to always keep your eye on your credit card debt load, and to take action as soon as you start to fall behind.
Q: What is a common issue you see, that keeps people from getting out of debt?
A: It’s unfortunate, but the second a consumer uses credit to spend out of his or her means, a relentless cycle of paying ever-increasing minimum payments begins. This isn’t to say the consumer is spending irresponsibly either, there are many valid reasons to justify using a credit card on a large purchase.
You might have car trouble that needs immediate attention, or other important yet unexpected costs. Unfortunately, you may only be able to afford paying off the minimum each month. This payment method just barely skims off the interest accrued each month, which can lead to an endless cycle that can feel impossible to overcome.
This often leads to opening more credit cards to help get by, which only feeds the credit card debt monster. It’s important to closely monitor credit card usage, and to avoid making large purchases at all costs.
Getting sucked into the cycle is much more common than you’d think. If you feel like you’re deep into the cycle and buried by credit card debt, we have solutions available to you at Rescue One Financial. It helps to know you’re not alone in the fight against debt.
Q: What are the common mistakes people make when getting into debt?
A: The top 3 most common mistakes:
- Racking up more debt than can be paid off in one month
- Making only minimum monthly payments
- Treating credit cards like additional disposable income as opposed to an expense
Q: What is the difference between good debt and bad debt?
A: The top main sources of “good debt” are homeownership, educational debt and small business ownership. “Bad debt” most commonly refers to credit card debt, and auto loans.
The biggest factor in determining whether debt is good debt is to consider the return. For homeownership, the consumer builds equity over the life of the mortgage, and ideally may sell the house at a profit. The home is an appreciating asset, an investment that if handled properly contributes to wealth and increases net worth. Educational debt is beneficial because it is a different kind of investment. Investing in personal education is positively correlated to a higher earning potential. That’s not to say all educational investments are beneficial, and it is important to do research in a chosen field to determine whether or not the investment in education will yield a profitable return. (i.e. spending 150k on an English degree might not be as profitable as a degree in a field with more job opportunity, like medicine or engineering).
Bad debt can be spotted by assessing the long-term value of whatever it is that you’re purchasing. Auto loans are considered “bad debt” because a car is typically a depreciating asset. Paying high interest on a car that will undoubtedly lose value over the life of a 5-year loan leads to the consumer losing money on that investment. By the time the car is paid off, it’s value will have diminished significantly. While experts agree it is much more beneficial to buy a car out right, if you must finance, it’s wise to find a loan with little to no interest, but experts
Credit card debt is probably the worst form of bad debt, because interest rates are often significantly higher than the rates on consumer loans, which can lead to an endless cycle of paying minimums just to keep afloat. It’s a dangerous cycle that is all too easy to slip into and should be avoided at all costs. In the right hands, a credit card is a great tool to build credit. The responsible way to use a credit card to your advantage is to make small purchases that are paid off monthly in full. Avoid using credit for purchases you cannot pay off in full.
Q: What do you believe is the most important thing people should know about debt?
A: A high credit score does not guarantee much without a healthy debt to income ratio. Too many people believe that financial health just means keeping a good credit score, and making payments on time. This is simply not the case and there are actually many other factors at play. When it comes to ensuring you are lendable, you must be sure to keep a healthy debt to income ratio. An easy way to check this is to take all your monthly debt payments divided by your gross monthly income. Even with a great credit score and 100% on time payments, if you have a disproportionate debt to income ratio, lenders are much less likely to lend to you. And the loans you will qualify for will often come with hefty interest rates.
Q: What is the difference between secured and unsecured debt?
A: The main difference between these two types of debt lies in whether or not the debt is backed by collateral.
Secured debt involves a promise to repay the debt in tandem with some asset put up by the borrower as surety for the loan. Some of the most common types of secured debt are mortgages and auto loans. In the event the borrower is to default on the loan, the collateral asset may be collected by the lender and used to repay the funds advanced to the borrower. With so much more to lose, the borrower is statistically less likely to default on these kinds of loans, which typically makes these loans easier for consumers to obtain.
Unsecured debt on the other hand has no collateral backing. It requires no security, and in the event of a default usually requires the lender to initiate a lawsuit to collect outstanding funds owed. Examples of this kind of debt are medical, credit card, installment memberships. Without the assure of collateral, lenders can charge hefty interest rates which justify the risk of lending. This is why individuals with higher credit scores can obtain much better interest rates that those with poor credit. If you have a demonstrated history of making good on payments and maintaining a low debt to income ratio, it’s a lot less risky for lenders to extend a line of credit to you.
Q: In your experience, what advice would you give to consumers to help avoid bad debt?
A: You can avoid bad debt by saving up for large purchases and depreciating assets. Always avoid using credit cards for purchases that you know you cannot pay off in one or two payments max. Do your research on your investments to determine what your return will be.
Q: What is a common misconception people have about debt and debt handling?
A: A lot of us associate the word “debt” with stress and I think this approach to understanding debt actually leads to a lot of bad financial habits. Debt is an important part of life, and with a little effort to educate ourselves in personal finance, we can all make better choices to use debt to our advantage. Contrary to what most people think, debt is an essential tool to build wealth, and it is important that we use it that way. Make smart investments that will only be more valuable to you overtime, and avoid spending money you don’t have with credit cards.
What is a debt collecting agent and what do you recommend consumers do when they are contacted by one? Debt collecting agents are typically salespeople hired by creditors or collection agencies. It is important to know if you are dealing with the original creditor like Discover/Amex or a third party that has purchased that debt. Collection agencies typically buy debt at a much deeper discount and are much more willing to work out a deal than the original creditor might be.
What are some common misconceptions people have about debt collecting agents? Most people don’t know that these are commissioned salespeople and they do have the ability to negotiate. They also are highly regulated, and you do have rights as someone that is debt. They cannot call your friends or family; they cannot harass you at work if you ask them to stop. They cannot threaten law enforcement inclusion in any way.
How often do people default on their debt because they aren’t aware of the options available to them? Most people we believe exercise all of their options prior to going into default. Most people have an understanding of credit and how important it can be and do their best not to tarnish it. On average, about 5% of all unsecured debt issued will go into some form of default nationally.
What are some ways consumers can work with their agents to handle their debts? First reach out to the creditor before you are in default or starting to miss payments. Some creditors today offer hardship programs similar to Consumer Credit Counseling where the debtor is paying back 100% of what they owe at a deep discounted interest rate. Consider taking out a consolidation loan, while you will still technically be in debt, it may provide some payment relief in order to get out of debt faster.
In your opinion, what is the most important skill one should have in this field? Compassion is the biggest skill that one must have. Consumers heavily in debt can be in a very sensitive state and could have circumstances beyond their control. Listen to the borrower and understand why this happened, then offer reasonable options.
Q: What is the biggest benefit you see when people get out from under large amounts of debt?
A: Mental health issues and struggling with debt are strongly correlated, those with large amounts of debt are three times more likely to suffer from mental health issues.
After our clients have found a way to get out from under their debt, mental health improves drastically, because they no longer have the dark cloud of debt looming overhead. In addition to the stress relief they experience, our clients have also reported other benefits. We make sure to help our clients develop better financial habits which lead to a longevity of financial health. Creating and maintaining a budget has helped our clients to afford to pay all bills, keep and build a savings account and have money left over for recreational purchases that would otherwise lead to a guilty conscious.
Debt can cause problems with personal health as well as individual finances. Dealing with debt is often stressful and leads to consumers feeling tormented by guilt and even hopelessness. Working with a legitimate debt relief agency such as Rescue One Financial is a good way to take charge of your finances and leave those feelings of isolation behind. Financial Consultants are experts on all things debt, and are great sources of information on how to improve and maintain financial health.
Some of the statistics are sobering. Nerdwallet’s study of 2019 credit card debt found about 11% of people without young children believe they will never be free of debt. Carrying credit card debt is expensive, because interest rates continue to climb leaving the consumer to pay back much more than originally borrowed. In August 2019, the average credit card interest was 16.97%. Offering minimum monthly amounts on bills mostly pays some of the interest without even touching the principal. This is why, with minimum payments, consumers often may not feel like they are making progress on paying down their debts, because in all actuality, they are not. Furthermore, carrying large amounts of debt from month to month without significantly paying down the principal can interfere with saving for retirement.
Achieving and keeping good financial health takes work and focus. Those people who have never practiced keeping and following a budget should learn how to keep track of both their income and their expenses every month. Actively paying off large debts may seem difficult initially. Consumers may need to change habits and become accountable for every penny. Dinners in restaurants, expensive tickets to films and live performances—these luxuries may have to be sacrificed for a while. However, finding free options for fun can become a treasure hunt, and watching debt amounts shrink is a reward in itself.
While some debts are generally considered positive, such as a mortgage or an education loan, sinking under general debt can signal poor spending practices which leaves consumers much less likely to qualify when applying for “good” debt. No matter what caused a consumer to take on such large amounts of debt, Rescue One Financial teaches its clients good money habits such as making a monthly spending plan and sticking to it. With time and effort, finances can be repaired and turned around so that the future looks brighter.