Effective Debt Solutions

 

I recently attended a webinar titled Safe and Effective Debt Solutions presented by the Foundation for Financial Planning. Below are seven key take-aways:

 

Debt Statistics- In early 2025, Americans collectively owed approximately $1.2 trillion on their credit cards and almost half (48%) of credit card holders had revolving debt, which means they pay interest on their outstanding balance. Credit card interest rates currently average over 20% and it can often take 20+ years to repay outstanding balances with small minimum payments.

 

Avalanche and Snowball Methods- These are popular strategies for paying down debt with additional payments beyond required minimum payment. The avalanche method prioritizes paying off debts with the highest interest rates first, while the snowball method focuses on paying off the smallest debts first, regardless of interest rate. Unfortunately, these two methods are not useful for people with very tight cash flow and no extra income to apply toward outstanding debt.

 

Essential Data- Borrowers with outstanding debt need to assess their financial situation to develop a plan to move forward. This includes compiling a list of secured and unsecured debts and their balances, checking their credit report and score, and making a list of overdue accounts.

 

Consumer Debt-to-Income Ratio- This is another key piece of information that measures the percentage of a person's net (take-home) income used to pay consumer debts, such as credit cards, auto loans, student loans, and personal loans. A lower ratio suggests financial stability, while a higher ratio indicates financial strain. Most lenders prefer this ratio to be below 20%.

 

Confusing Terminology- Many people confuse debt settlement services by for-profit companies with debt management programs (DMPs) by non-profit organizations. DMPs typically plan for a “debt free date” in three to five years and require clients to have positive cash flow and to close or stop using their credit card accounts. An administrative fee is deducted from monthly payments to the sponsoring non-profit organization which are pro-rated among clients’ existing creditors.

 

Due Diligence- Webinar attendees were encouraged to research the reputation of credit counseling agencies that offer DMPs and to choose certified NFCC non-profits. The National Foundation for Credit Counseling (NFCC) is the largest nonprofit network of certified credit counseling agencies in the U.S. and sets industry standards and accredits financial counselors.

 

Debt Consolidation Loans- There are pros and cons. An advantage is the potential for a lower interest rate than, say, the APR charged on credit cards. A risk is that overall debt will increase if people make purchases on credit cards that were paid off with a debt consolidation loan. This quote from the webinar says it all: “You can’t get out of a hole by digging it deeper.”

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.