By Ankur Shah. Originally published at ValueWalk.
While the average American household is struggling to keep a grip on their personal finances and debt burdens, the rising cost of living and median household income has been outpacing each other; placing financial strain on millions of people.
As of 2021, more than 77% of American households have at least some form of debt to their name, while the average U.S. adult is roughly sitting with $58,604 of debt. But these averages are not the same across the generational spectrum either.
According to data published by Experian, consumer debt has reached an all-time high totaling more than $14.8 trillion, growing at an annual rate of 4% since 2015.
In the United States, Generation Z (aged 18 to 23) holds the lowest amount of debt owed at $16,043, while Generation X (aged 41 to 56) has an average of more than $140,000 debt owed. Debt payoffs were seen stagnating during the first few months of the pandemic, as the government looked to completely or partially freeze debt repayments, with the Feds pushing lower interest rates.
Even after the partial debt freeze, and low-interest rates which have now been hiked up to 0.25% in recent weeks as the government tries to strife against soaring inflation – the debt burden is now overshadowing millions of American households, and it’s only getting more serious.
As households struggle to establish a manageable debt repayment strategy, and burdens start to make a deeper cut into the pockets of the average American family, how can debt relief assist with alleviating the stress and difficulty associated with growing debt?
What Is Debt Relief?
Debt is not an easy challenge, and while it depends on the type of debt you owe, either medical bills, credit card debt, student loans, unpaid or overdue taxes, or personal loans – debt relief is a strategy that enables you as the consumer to make adjustable debt-relatable payments either by yourself or through the aid of debt settlement companies.
Ultimately, debt relief is an umbrella term that can be used to describe a consortium of things. These include debt settlement, debt counseling, DIY debt relief, or debt management. Depending on the severity of each situation, and the type of debt you need to repay, there are various options available to help lessen your debt burden.
Although consumers can choose from different debt relief strategies, it’s not to say it might always go as planned. Debt relief can hinder your overall financial growth and stability, and while debt has played a major part in this, the road to repayment doesn’t come without its discomfort.
Risk of Debt Relief
Yes, repaying debt is one of the most important things any person in a stringent financial situation is looking to do. It can take years before your name can be cleared of any debt, and depending on your strategy, there are some risks you should be aware of along the way.
Aimless Debt Management Plans
A debt management plan can help you repay certain types of debt such as credit cards, typically referred to as unsecured debt. Even with a debt management plan, some participants struggle to meet certain requirements or complete the plan at all.
If payments are missed, or cannot be repaid, credit unions and banks can close your credit card accounts. This leaves you without the safety net of having a credit card, and while the management plan might not impact your credit score, having an account closed can.
Lower Credit Score
Having accumulated any type of debt, and especially that which can’t be repaid can have a direct impact on your credit score. And while at the time it might not sound like the most serious issue at hand, restoring your credit score can take as much as ten years, if not longer.
Some participants file either for Chapter 7 or Chapter 13 bankruptcy, which can help wave off any debts or amounts owed. In most instances, people have found success filing for bankruptcy, but rebuilding your credit score can take as long as 8 years.
Some strategies won’t necessarily hurt your credit score, but these account only for individuals who don’t miss any payments or fall behind on their repayment schedule.
Increasing your debt
Even as you look to repay debt or outstanding amounts you may run into a situation where you increase your debt even more than what it already is.
Some debt consolidation or other forms of credit may offer short-term debt relief, but there are initial fees, interest, and penalties attached to this as well. In some instances, people rely heavily on their credit cards to repay their debt, which is one of the last routes one should take, as this can quickly amount to even higher repayments, and the interest that comes with it.
Taking out a consolidation loan can also come with a loan origination fee. Companies that are open to negotiating a debt settlement plan might charge you as much as 15% to 20% on the amount settled or forgiven for their services.
Rewards of Debt Relief
There’s no better way to describe the feeling of being completely debt-free, and while it takes a bit of time to finally get there, it is possible to completely rid yourself of any debt burden.
Variety of Debt Relief Strategies
There are a variety of debt relief strategies available that work to mitigate the burden of debt and the stress that’s associated with it.
While the road to being completely debt-free is not easy, meaning you might need to seal off your car, a house, or perhaps some prized possessions; being debt-free puts you in a better financial environment and can help set up a road towards financial growth.
Less debt, fewer risks
Having any form of debt to your name comes with an unimaginable amount of risk if not properly managed. If your debt is not completely unmanageable, you may be able to apply for a credit card with a 0% transfer offer.
This allows you to transfer all the owed debts to one account, meaning you’ll only need to make one payment per month. This does allow you some time to strategize a new management plan, but it also gives you a bit of legroom to repay outstanding debts.
Rebuilding your credit score
It may have taken a bit of a knock, and yes, it’s not going to happen over a few months before your credit score is where it used to be, but you’re now able to rebuild your credit score, while at the same time being more aware of how to better manage your debt.
Not all debt scenarios are the same, and it mostly depends on how well you’re willing to manage your debt or how serious the situation may be. Ultimately, you have some alternatives available that you can either use to negotiate or consult with a debt counselor.
The Bottom Line
While it may seem as if it’s completely impossible to repay any type of debt, some strategies exist to aid you in various ways. Repaying debt can look different for a lot of people, and each scenario isn’t the same.
The seriousness of dent should never be ignored, or perhaps overshadowed by other financial strategies, as it ultimately determines the health and standing of your short and long-term financial endeavors.
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