CBS Minnesota: Falling behind in credit debt? You can seek counseling for relief

MMI’s Thomas Nitzsche and MMI client Barbara Scharf join Derek James at CBS Minnesota to discuss debt management and emerging financial trends as debt levels rise and the cost of living remains high.

Transcription:

While rent, food, and gas get more expensive, so does the cost of debt. More Minnesotans are falling behind on their credit card bills and turning to credit counseling for help. Derek James talked with one metro woman who's using a debt management plan to dig out of debt.

When Barbara Scharf of Maple Grove got laid off from jobs twice in 12 months, she turned to credit. "I used my credit cards just to um save my cash um because I didn't know when my next job was going to start," which is a little bit scary. The payments on multiple cards became unmanageable, reaching over $20,000. "When your um interest payment is like a hundred and some dollars, so then I'm like I'm not making a headway, and that was a huge reality. I'm like I need to do something different."

A friend suggested Money Management International, a nonprofit that offers financial education and debt management plans. "By working with the client and the creditor, we can get the interest rates down usually around 7% in order to make most of that payment go towards the principal rather than interest."

MMI worked with Barbara's creditors to reduce her average interest rate from over 27% to under 9%. "They tell you exactly what your payment plan's going to be and then they draft it from my account and pay the creditors every month." For those who do enter into a debt management plan like Barbara did, there are some small fees involved. MMI says its average client spends a little more than $20 per month, but that that cost is offset by the interest savings.

"On average, our clients come to us with about $20,000, actually it's now almost up to $30,000 um in unsecured credit card debt over on average about seven accounts so you can imagine the interest that's being accrued on those accounts at a 25% interest rate for example.”

“Not paying that huge interest um made a huge difference to make the gains and it's definitely worth it."

In 10 months, Barbara has paid off over half of her $20,000 debt. She uses any extra money she has to pay down the card that currently has the smallest balance, the ’debt snowball method’.

"I have one that's actually getting paid off this month. I had one that got paid off two months ago, which is super exciting." Thanks to a little help, she's now looking forward to the power of becoming debt-free.

"Well, I'm excited to build up my savings account again um increase my 401k at my employer and just you know focus on retirement."

When you start a debt management plan, whether it's with MMI or any other respected nonprofit credit counseling group, your credit cards are closed in the short term. Yes, that does negatively impact your credit score, but MMI says after paying down all of the debt, its clients typically see a score increase of about 84 points.

And we know that people are needing credit cards or leaning on credit cards more and more uh the middle class families um and and people under 30.

Yeah, so let's start with the middle class. What they're seeing is in the past it was folks that had under the median income for where they lived in Minnesota. Now they're seeing a huge increase in people who have above the median income so that that is a sign that inflation is really taking its toll. And then with younger folks, what they're thinking is a lot of kids post college are dealing with those student loans, the pay isn't keeping up with inflation either and that's why they're turning for help.

This part surprised me. I think you emphasized it when you said like a good establishment like MMI. So there are scammers out there or bad nonprofits?

Yeah, so you'll hear folks that are going to try to get you into bankruptcy or they may have some sort of plan where they're going to say don't pay it all right now and the idea is that okay eventually they'll settle settle for pennies on the dollar. May have even seen ads for that. Those are going to lead to really damaging your credit for much longer than doing something like this because remember you're still paying all the money you owe with a plan like this. It's just you're not dealing with the huge interest rates.

Got it. Good tips here, very helpful. Thanks, Derek.