BALTIMORE — As inflation drives up the cost of everyday items, many consumers are saddled with debt.
A Nerdwallet Study found that Americans maintain an average credit card balance of $6,000.
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For Jane Spence and her husband, they owed over $100,000 in credit card debt, mostly.
“We struggled for many years,” said Spence, whose husband’s income was suddenly cut by 60 percent. In addition, his company stopped offering health insurance, and medical expenses created more financial burdens.
The Spences refinanced their mortgage several times, but failed to catch up.
“We ended up using our 401K. I used some of mine and he used all of his and it hurt us a lot,” Spence said.
The couple considered filing for bankruptcy, but then learned of debt management plans.
“In a debt management program, creditors agree to reduce interest rates to around 6.4% and expect people to get out of debt in about four years on average,” said Thomas Nitzsche, director of media and brand for Money. International Management (MMI).
MMI administered Spence’s plan. Their eight credit cards have been consolidated into one account. MMI negotiated the interest rate at 7% and the Spences paid $1,900 a month, which helped them pay off all their debts.
“A total of $106,000,” Spence said. News WMAR-2 Mallory Sofastaii. “In less than five years.”
There is a catch, of sorts. You should close these credit card accounts so that you don’t accumulate debt in the process. If you go back to old habits, you risk your creditors withdrawing from the program.
The credit counseling agency also collects fees.
“On average, customer fees are about $24 per month, there’s a nominal start-up fee that averages $35,” Nitzsche said.
These agencies also receive payments from creditors.
“So called ‘fair payment.’ Basically, in exchange for administering the debt management program, the creditor also receives a percentage, so there is a vested interest of both parties in making sure they are successful,” Nitzsche added.
Debt Management Plans (DMPs) Can Help Consumers save thousands dollars in credit card interest.
For example, if someone had $18,000 in debt and paid the same amount each month to their lender as they would on a DMP, it would potentially cost them $27,000 more over time.
This plan, however, requires discipline.
If that’s not for you, there are other options, including debt consolidation.
Consumers are getting a new loan to consolidate their high interest cards, but interest rates vary based on your credit score. the lower your scorethe higher the rate.
With debt settlement, a company negotiates the amount you owe. Your credit could crash though while you withhold payments and hope for a settlement. You also risk being sued by the creditor.
Finally, there is bankruptcy. You are asking a court to pay your debts. This could have long-term repercussions on your finances and could cost you assets.
While neither seem like a great option, they offer consumers a way out over their heads.
“I think that really helped us a lot. We got used to budgeting our money better,” Spence said.
“If we can help people lower those interest rates and those credit card payments, that frees up money in their budgets to be able to allocate to the real basic needs that they have,” Nitzsche said.
Debt management plans only cover unsecured debt such as credit cards and personal loans, not mortgages or student loans.
And you don’t need a credit counseling agency to lower your interest rates. Call your lender and see if they’re willing to work with you, then also talk to an advisor to compare the rate they’re offering.
Consumers should work with nonprofit credit counseling agencies accredited by the National Foundation for Credit Counseling (NFCC).
Click here to find an NFCC agency near you.