The Need-to-Know on Debt Management

If you're a victim of debt, here's everything you need to know. 

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Many Americans struggle with debt: student loans, credit cards, mortgages, and medical debt. If you owe a balance, you know just how heavily it weighs on your finances – not to mention your credit score.

In fact, recent research shows that the American South struggles with poor credit scores the most. The primary culprit: outsized medical debt.

If you’re a victim of debt, it’s important to know that you’re not alone – and you can learn how to manage debt.

We've got Cleo's resident financial advisor, Anna, to answer some of your most-searched questions around debt.

Anna Yen, CFA, is a financial wellness expert with 2 decades of experience in financial markets.  This includes on the trading floors of JPMorgan and as a Director at UBS. She specializes in personal finance, derivatives, and alternative investments including crypto.

Here's what you need to know about debt.

A quick word on medical debt relief

An estimated 100 million people carry medical debt, among both the uninsured and insured. If insurance won’t pay up, you may be able to achieve at least partial debt relief by:

·      Checking your medical bills for accuracy

·      Asking your healthcare provider about debt forgiveness, lowering your bill, or negotiating low-interest payment plans

·      Requesting a hardship exemption or low-income financial assistance

·      Signing up for a medical credit card that offers 0% interest

·      Working with a debt relief counselor (more on that below) to help negotiate or pay your bills

If you’re really in a tough spot, you may decide to file for medical bankruptcy. But before taking drastic action, contact an expert to discuss the pros, cons, and other options.

Does medical debt affect your credit score?

Unfortunately, yes – medical debt can affect your credit score.

Fortunately, the Medical Debt Relief Act of 2016 changed when and how medical debts can impact your credit reports. Under this Act, credit reporting bureaus Experian, TransUnion, and Equifax must wait at least 6 months to add medical debt to your credit report. That gives you extra time to pay off or settle your balance.

And that’s not all. As of mid-2022, paid medical debts no longer weigh down consumer credit reports. And by mid-2023, medical bills under $500 won’t affect your credit report at all.

The Medical Debt Forgiveness Act

Some have argued that the 2016 Medical Debt Relief Act didn’t go far enough to protect consumers. And so, the Medical Debt Relief Act of 2021 was introduced. This updated Act would achieve two main goals:

1.    Extend the medical debt reporting window to a full year

2.    Ensure that paid and settled debts continue to be removed from credit reports

However, Congress has yet to pass the Act, leaving consumers waiting for relief.

How to manage debt

Whether you have medical bills, student loans, or credit card balances, learning how to manage debt is key to getting out of it. Some tried-and-true tactics include:

·      Sticking to your budget to track expenses

·      Making more than the minimum monthly payment

·      Setting up autopay so you never miss a payment

·      Paying off your highest-interest debts first

·      Negotiating lower interest rates with your creditors  

But if you’re still struggling to pay off your balances, debt consolidation or a debt management plan can help.

What is debt consolidation?

Debt consolidation involves combining several debts into one larger debt. In the process, you can:

·      Turn several payments into one payment

·      Negotiate a single, lower interest rate

·      Find a monthly payment that works for you

There are two basic kinds of debt consolidation: loans and balance transfer credit cards.

Debt consolidation loans

A debt consolidation loan is simply a loan that you use to pay off other debts. Typically, these loans make sense when you want to lump high-interest credit cards into one lower-interest loan.

You can also choose a repayment period that fits your budget. (But beware: longer repayment periods mean paying more interest.)

Balance transfer credit cards

A balance transfer credit card lets you transfer your other credit card balances and pay low (or even 0%) interest for 6-21 months. During that time, you can pay down your balance without racking up massive interest payments.

That said, you generally have to pay a 3-5% balance transfer fee, and new purchases aren’t covered by the low interest rate. Once the introductory period ends, your interest rate may skyrocket.

Is debt consolidation a good idea?

Debt consolidation can be a good idea – but it’s not always.

On one hand, debt consolidation makes it easier to simplify your finances and lower your interest rate and/or monthly payment.  

On the other, debt consolidation involves taking out more debt to pay off debt. That means you’ll need a good credit score to qualify for a lower-rate loan. If you miss a payment or continue to overspend, you risk damaging your credit score.

What is a debt management plan?

Debt management plans are structured repayment plans offered by credit counseling agencies. You’ll work with a qualified credit counselor who will:

·      Provide personalized financial advice on how to manage debt

·      Contact your creditors to create a debt management plan on your behalf

·      Negotiate lower payments, fees, or interest rates under your plan

After setting up your debt management plan, the counseling agency will take your new payment. Then, they’ll distribute the money to your creditors themselves. Generally, the goal is to pay off your debts in 3-5 years.

Finding a reputable credit agency

When looking for a debt management plan, it’s crucial to work with a reputable agency. The National Foundation for Credit Counseling and Financial Counseling Association of America can both point you to accredited nonprofits like:

·      American Consumer Credit Counseling

·      GreenPath Financial Wellness

·      Cambridge Credit Counseling

·      Money Management International

·      InCharge Debt Solutions

·      Credit.org

Is a debt management plan a good idea?

Debt management plans can help you get a grip on your finances and pay off large debts. They also offer benefits like lower interest rates and simplified payments without having to take on another loan. Many agencies also provide extra help like budgeting, loan, and homebuying workshops.

However, debt management plans aren’t free. Most providers charge an initial enrollment plus ongoing monthly fees. You’ll also have to contend with other limitations, like:

·      Closing any credit accounts under the plan

·      Not using any credit cards while you’re enrolled

·      Strict payment schedules

·      Some creditors refusing to participate in the plan

Lastly, it’s important to note that some creditors won’t work with debt management plans. And most secured loans (like mortgages and home loans) and student loans aren’t eligible at all.

You don’t have to let debt manage you

Having debt is actually pretty common in America. But when a medical event or lost job gets you down, you shouldn’t have to spend the rest of your life paying for it.

That’s where managing your debt comes in.

With good financial habits (and perhaps some support) you can get back on your feet and kick your debt to the curb.  

Wanna start saving or would like to build an emergency pot for those unexpected expenses? We've just the thing.

Making a budget that works for you is all about understanding your expenses each month and having the flexibility to adapt if circumstances change.

All you need to do is answer a few questions around your income and bills in the Cleo app and you’ll then be able to set a realistic spend limit and start saving 🚀

For more on this, check out How to Make a Budget With Cleo.

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Big love. Cleo 💙

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