How to Complete an End-of-Year Debt Assessment
The final months of the year can be filled with a steady hum of family gatherings, gift buying, and tending to last-minute matters. But December can also serve as a period of reflection, getting perspective on the year that was and preparing for the year ahead.
If you’ve been too busy to sit down and take a closer look at your debt, the end of year is the perfect time. Here are some simple tips for assessing your debt and setting a plan for the next year:
Make Sure Your Debt Load Is Manageable
Debt isn’t inherently bad and it’s entirely possible to have a completely manageable amount of debt. But for a debt load to be manageable, two things need to be true: you need to be able to comfortably afford the costs of your debt, and any growth in your debt needs to be in proportion to your income and financial capacity. In other words, you need the income to handle your debts, and income was a challenge for a lot of consumers in 2020.
“When income is limited, people prioritize their daily expenses over debt,” says Brandy Baxter, an accredited financial counselor and founder of Live Abundantly. And when you’re out of a job, you might need to resort to digging deeper into debt to make up for reduced income. “On the surface, this strategy seems to make sense,” says Baxter. “However, without a cash infusion or an income increase, your debt will only continue to grow and create a bigger challenge in the future.”
Do you have the income to support your debt? Was your income reduced or cut off for a period during the previous year? If there’s a gap there, you may want to prioritize debt repayment next year, either through increased earning, decreased spending, or a structured repayment plan.
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Grade Your Progress
Just like how a teacher calculates grades at the end of a semester, you can take a good look at your debt to see where it stands, explains Baxter. First, look at your credit card statements. Has your credit usage increased during the year? Have you had to take on a personal loan, or incurred medical debt? It’s also a good time to sit down and calculate how much interest you paid throughout the year.
If a debt has defaulted, and you’re not sure where your debt is exactly, contact the creditor to see if it’s been moved to a collections agency. You’ll also want to review your debt to make sure you’re aware of the total balance, interest rate, and your monthly payment.
Where are you versus where you started the year? And, more importantly, where are you versus where you want to be? Do you feel like things are moving in a positive direction? If not, it may be time to reach out for a little additional support.
Baxter suggests taking a look at the section of your credit card statement that shows you how long it’ll take to pay off your debt if you made only the bare minimum payment. It could be eye-opening how long it could take — and how much you would pay in interest fees alone.
Reach Out To Your Creditors
Your creditors want you to succeed. And by succeed, we mean that they want you to pay back your debts and then borrow more in the future. Defaulting for missed payments is bad for both of you.
During these difficult economic times, creditors and lenders are often willing to talk to you about your situation and explore options to make your debt more manageable. Some credit card companies have some information on forms of relief on their website. That can be a good place to start if your debt has been trending in the wrong direction this year.
“If you’re a client that has been in good standing and has never missed a payment, reach out to them to see what they might be able to lower the interest rate before you find yourself missing payments,” says Baxter. “Remember: The answer is always no, if the question is not asked.”
If you're not feeling positively about where things are headed, connect with your creditors to ask about waiving late fees, temporarily pausing payments, or lowering the monthly payment amount.
Look Into Repayment Options
If it's time to take a more focused approach to debt repayment, there are ways you can potentially lower your monthly payments, interest fees, or both. For instance, debt consolidation lumps all of your unsecured credit card debt into a single payment. That may make it easier for you to manage your debt, particularly if the consolidated payment is lower and the interest rate is an improvement on what you were previously paying. However, debt consolidation loans usually require a strong credit score to qualify, and if you’ve been struggling your score may have been dinged already.
Another standard option is a balance transfer, where you move your credit card debts to a new card, often with a low introductory interest rate. While a balance transfer could potentially save you money during the intro period, there’s usually a balance transfer fee, which is anywhere from 3% to 6% of the outstanding balance. And of course that low interest rate often only lasts 6-12 months.
Besides debt consolidation and refinancing, you can also look into a debt management plan (DMP), which is similar to a debt consolidation loan: you make one payment and there’s usually pretty substantial savings on interest charges. A DMP isn’t a loan, however, making it a great option for consumers with a low credit score.
At the end of a particularly challenging year, it's important to take stock and set an appropriate course for the year ahead. There will always be plenty of factors in life that you simply can't control, so focus on what you can do, make a plan that suits your goals, and never hesitate to ask for help when you need it.
Don't forget: budget counseling is free and available 24/7!
