How Your Financial Institution Can Help You Dig Out of Debt

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Throughout my career, I have observed firsthand the ebbs and flows of the economy and its profound impact on the financial lives of consumers. In recent years, a troubling trend has emerged: a significant rise in the reliance on credit cards, fueled by soaring prices for essentials. This shift has pushed many Americans into deeper debt, as highlighted by the New York Federal Reserve, which shows a record $1.1 trillion in U.S. credit card balances in the fourth quarter of 2023.

With 45% of American adults burdened by credit card debt, the situation is dire. The about 25% year-over-year surge in credit card balances, coupled with a 16% drop in total repayments, is alarming. These figures are not just mere statistics; they symbolize a potential long-term financial crisis for consumers. The challenge is multifaceted, fueled by an environment of high interest rates and inflation, which only serves to prolong the debt cycle for many.

Take action by getting help

It's crucial that consumers facing debt not shy away from their financial realities. Banks and credit unions provide resources designed to aid in debt management, including financial education and personalized coaching. Consulting in-person with your bank or credit union’s debt management expert can build a partnership, giving individuals an opportunity to regain control of their financial futures.

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Debt management programs can also play a critical role. Offering a blend of budgeting assistance, financial planning and negotiation services, these programs can provide a roadmap out of debt.

However, consumers must approach these services with caution. Some claim to lower your outstanding debt through negotiation, which can be expensive and carry hidden costs and potentially adverse implications for credit scores and taxes.

Go back to the basics

When looking to get out of debt, return to basic financial principles. Set and stick to a budget. Do the math and sort out the cost of essentials, including utility bills, each month. Assess your discretionary expenses and make some tough decisions. What can you do without as you work to draw down your debt? Then set goals for the next year.

As part of your discussions with a trusted financial professional, determine how much debt you can pay off over the next year. Both exercises will help you live within your means, reduce dependency on credit and enhance overall life quality.

Make smart decisions and avoid traps

With a plan in place to pay down your debt, it’s important to make smart financial decisions to avoid digging yourself into a further hole. When you have to make a significant purchase, say replacing your home’s furnace, consider what makes more sense — running up your credit card balance by five figures or opting for a loan.

I advocate for a prudent approach: If repayment within a short time frame is unrealistic, securing a loan with a more favorable interest rate and structured repayment plan may be more advantageous. Shop around for a good rate. Oftentimes, credit unions offer better rates than some of the major banks.

The popularity of Buy Now, Pay Later (BNPL) reflects a changing landscape in consumer finance. While these services offer an alternative to traditional credit, they are not without risks, particularly for those in fragile financial positions. A recent survey from the New York Fed found that 43% of households with a credit score of 620 or less have used BNPL.

Many times, people turn to this option due to credit card delinquencies or because their credit application was denied. If you miss a payment using one of these services, the debt may grow more exponentially than it would with a typical credit card. Be sure to fully understand the terms and potential consequences before considering this option.

The broader impact

The repercussions of debt extend far beyond finances. It affects individuals' mental and physical wellbeing, their capacity to save for the future and their freedom to make significant life choices. Consider the effects of facing deep debt:

Not able to save for large purchases, like vehicles
A depleted emergency fund, which can leave a person vulnerable to unexpected monetary obligations
Retirement contributions left short, sacrificing the future
No vacations
No saving for your child/children’s education
For younger folks in debt, it’s very hard to save for a house
Decreased credit scores, leading to higher debt

The surge in credit card debt should serve as a wake-up call for a collective push across banks and credit unions toward enhanced financial literacy programs, support, and a culture of responsible borrowing. Leaders in the financial sector should remain committed to guiding consumers through these turbulent times.

Through education and support, we have the power to help consumers facing steep debt to turn their financial lives around and to set the next generation of consumers on the path toward financial responsibility.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Kevin Brauer, a distinguished finance industry professional with over three decades of experience, has been at the helm of Affinity Credit Union as CEO and President since January 2023. His substantial contribution to Affinity over the past seven years has been instrumental in propelling the firm's value proposition and innovating its financial well-being initiatives. Brauer leads Affinity's dedicated team of 500 employees at its Basking Ridge, N.J., headquarters and throughout its 18-plus branches.