The real consumer debt issue

With consumer debt reaching a staggering 1.5 trillion dollars, it can be extremely difficult to know when one’s personal debt is surmountable, or if it’s become a life-changing issue. To learn more about the options someone in debt can have, who to avoid, and who can help, we organized this EXTRA episode. At the table to talk about that today are Rebecca Steele, president and CEO at the National Foundation for Credit Counseling, Bruce McClary, vice president for communications for the NFCC, and Richard Levick, founder and CEO of LEVICK.

ABERMAN: Let’s explore what are some of the factors that have led to the growing consumer debt level. I think it’s over one trillion dollars now. What’s been the main catalyst for this borrowing? Should we be worried about it? What do you guys think?

MCCLARY: One of the things that’s top of mind for me is, you know, we’re coming out of the holiday season. And I was looking at some of the statistics of how much debt people added to their already significant debt load over the holiday season. The average American consumer added thirteen hundred dollars in debt to their existing debt load during the holidays. So that debt, if you make minimum payments to pay off that debt, assuming it’s credit card debt, being charged at the average interest rate of 18 percent. That could take six years to pay off that debt given that amount of money. And then there’s one in 10 that are still carrying debt from the 2018 holiday season.

But that’s a small piece of the puzzle. So, there are a lot of other factors that are also influencing the current debt levels. We’ve got a significant lack of savings in this country. We’ve seen all the reports about the 400 dollar threshold, a significant portion of Americans not having at least 400 dollars to cover an emergency expense. So, where are they turning? Of course, they’re turning to debt. The available lines of credit that they have, they’re turning to borrowing to fill that gap. So that’s another area of concern as well. That’s leading to this significant amount of debt that we have in this country.

And it’s actually 1.5 trillion dollars of unsecured debt right now in this country, which is really going toe to toe with some other significant areas of debt, like student loan debt, and auto loans, and other things like that. So you think about the fact that 1.5 trillion is unsecured debt. Unsecured debt comes at a higher cost of borrowing than some collateralized loans and student loans and other types of credit. So that’s another problem as well. The money that people are borrowing in these situations is coming at a higher price.

STEELE: And I’d just like to add to that, since is Bruce is exactly right. It’s hard to get out of debt. That is one of the major problems that we have. There are less choices for workouts and settlements and moving your balances from card to card. That is very, very difficult. The other fact is that many consumers have more than five credit cards, and they’re switching between these credit cards to make ends meet. This is a huge problem. So it makes it more complicated. It’s not just about calling your credit card company and renegotiating the balance. It’s really about, now you have five major creditors to call and to try to work out these balances.

And it’s hard to get a hold of those credit card companies. And there’s a lot of predatory options out there, which are really bad and destructive for people, too. So when there’s cash in debt, you know, predators come out of the woodwork. So, you have to be very, very careful. And I kind of call it the wild, wild west of debt. You know, you can’t shop. You can’t do it yourself. So, where do you turn? So, there’s fewer options than we need today. And that’s one of the reasons why nonprofit credit counseling is a really important step to learn and educate, and understand budgeting.

Because it’s not the super prime and prime. It’s really subprime. And subprime is growing. And we remember the housing crisis just 10 years ago. It seems to me like it was yesterday, that 9 percent of the market in housing caused that destruction in the housing market, and in our economy. And we’re headed toward a 1.5 trillion and growing unsecured debt, which could trigger another recession.

ABERMAN: You’ve got the 1.5 trillion dollars in consumer debt. You’ve got trillions and trillions of dollars of government debt that’s trading below inflation interest. People are actually paying governments to take their money right now. Corporate debts probably, in many cases, below real interest rates as well. Seems like there’s debt everywhere. Richard, clearly we’ve got some consumer things to talk about today, but is this a global issue, a bigger issue?

LEVICK:Well, I think it’s both. You’re right. First of all, debt is a fairly new instrument. You know, you think post-World War 2, the G.I. Bills, student loans. The whole concept of mortgages. This is fairly new, for just a couple of generations. And we’ve gone from it being a rather new tool, one in which initially shame was involved, if you were to have this debt, to where everyone, almost everyone expects to have debt. We’ve seen the movies, OPM, other people’s money. And yet there’s always been this sense of sort of an in loco parentis, a parent there that will somehow come in and reach in and save us. And we see the federal government doing that.

We see consumers doing that, that we think that if we get the 5th credit card, the sixth credit card, that somehow this will all salvage itself at some point. There are two last points that I want to make. One, that George Will column last year in which he talked about the fact that the federal government never engaged in debt unless it was to do something for the future. Roads, bridges, national defense. The federal government no longer feels that way. And then, on a personal level, Rebecca, you raised the issue of predatory lending, and that has an ominous sound to it. What do you mean by that?

STEELE: That really means that there are people out there, and companies out there, let’s take fintech, for example. Fintech is a really popular growth area for companies out there, lending money. It’s easy to lend money today at high interest rates, at high feed costs. You really have to know how to shop, and how to understand those particular programs. So, predatory is where somebody is being charged more than they should, if they were able to really shop and understand their options. And, higher fee charges for lower credit. So really understanding how to get the right credit, in order to access money, and loans, and personal loans and other things. It’s a very, very complex ecosystem out there to consumers.

ABERMAN: It is very complex. And I want to help our listeners out for a moment, and just take a step back. Well, we’re talking about two different issues here. One is debt from a standpoint of, you borrow a sum of money, which you repay sometime in the future. That amount is fixed. The variable part is the interest, the rentals that you pay for the money. And that should be associated with your risk, the riskiness of the borrower. You know, hypothetically, the more risk that somebody won’t repay, the more interest can be charged, 18, 20, 25 percent, 6 percent, whatever. It sounds to me that what we have right now is, we’ve got the systemic issue, Richard, which is: there’s borrowing going on everywhere to finance current demand with future borrowing. We’re no longer borrowing to build bridges. We’re now borrowing to make payroll.

Which is a systemic thing, but bringing it down to consumers. Rebecca, the predatory point. Money in a free market economy has a cost. Are you saying that what’s happening now is, people are paying more than they should be fairly, because they’re being preyed upon? Is that what’s going on?

STEELE: I would say generally not. I would say that interest rates today, you know, on a typical credit card, are going to run anywhere from 20 percent to 30 percent. That’s an average.

ABERMAN: Which means that you’re effectively paying a third a year on the money. So if I borrow a thousand dollars, I’m paying back three hundred dollars just to stay even.

STEELE: Right. And if you can’t pay off the full balance, understanding the impact of that interest payment on your budget is really where people aren’t thinking right now, and they’re not planning for that. And that’s why they’re paying minimums. So, you pay a minimum amount, you will never pay off your credit card. So, really understanding the math behind that, and having someone maybe help you understand what that payment is, is really important. But predatory more generally, I think, is: I liken it to a zip code. So if you know a zip code of a consumer in the United States today, you know a lot about them. You know where they live.

Number one, easy. But you also know their FICO score, you know their medical situation. You most probably know their education. This is called segregation. And in today’s economy, it’s very much segregated by zip codes. So, what does that mean? That means that it’s easy to prey upon people in certain areas that have lower credit, that may be stressed with any kind of financial crisis, or life events. And that really enables predatory lending, and predatory moves like payday lending.

ABERMAN: It’s almost like reverse blue lining.

STEELE: It absolutely is.

ABERMAN: Bruce, you’re all in the middle of this, at the National Foundation for Credit Counseling. So, let’s take it from a consumer standpoint. What do we need to do to arm consumers, so they can better handle themselves in this kind of situation?

MCCLARY: Well, I think I think one of the things it’s important to do, in terms of getting the right information in front of consumers, is to protect them from some of the more dangerous choices in getting out of debt, and offer safe and responsible alternatives to those. We talk about the landscape of debt relief opportunities for people, and we see the ads on TV. We listen to the ads on the radio, constantly promising things like settlement of debt for pennies on the dollar, for more than 50 percent. You know, turn to these companies to get out of debt and just walk away from it. Let us handle it. Those, a lot of those offers, are dangerous. There are warnings out there from the FTC, from the CFP. The BBB has miles of complaints about these debt relief companies that are out there, and essentially what they’re doing can be described as being just as predatory as what some of these lenders that we were just talking about earlier were doing.

So, I think one of the things that needs to be done is to protect consumers, and let them know, this is the danger area over here. There are safer alternatives. Here’s what you should be doing to responsibly manage your debt. Here are some alternatives to help you get out of debt that are not as dangerous. A lot of the debt relief companies, the for-profit debt relief companies, what they’re doing is, they’re telling people that they’ll settle the debt. But what they don’t tell people about is what that involves. A lot of times, that involves forced delinquency, putting people who are not seriously delinquent into a state of serious delinquency in order to negotiate. And that’s like dropping a nuclear bomb on somebody’s credit health. It just makes it so much worse.

And in the event that they’re not able to successfully negotiate, what is that person to do? Because now they’ve destroyed their credit in order for the chance to have a negotiated settlement, and then a lot of these settlement companies with low success rates are coming back and saying, well, you know, gee, we’re sorry we couldn’t negotiate this settlement for you. You’re left on your own now. And by that time, your creditor’s probably suing them for the balance that they owe. So, really dangerous avenues that people can go down to try to resolve their debt out there.

ABERMAN: Let’s help our listeners. Let’s give them some guidance for how to cut through the noise, and actually get the help, or get a plan, so they can deal with this challenge.

STEELE: I think one of the first things you really want to talk about is taking that first step. It’s really important not to be afraid to take the first step, and understand where to go for that. So maybe, Richard, I’ll ask you around the psyche of the consumer, and what they need to do to get past the fear of taking that first step. What do you think?

LEVICK: Well, you know, first of all, we talk about shame, and then we move past it as if simply mentioning the word is enough to understand its power. It’s sort of like describing to a Martian what love is by simply giving them the dictionary definition. It’s great power. You talked earlier in the episode today about what happens during the holidays, people taking on about thirteen hundred dollars on average in additional debt. Why? Because everywhere you turn is buy, buy, buy. The kids come home and they want something and you want to show your love.

So this shame cycle is inculcated in everything that we do. But then, when it happens to you personally, you don’t see yourself as someone in debt. I can work my way out of this! It takes a long time to understand that you need help. And the fear is, when you’re there, it’s sleeplessness, because it’s not just, well, how am I going to pay this credit card? When the dishwasher breaks, or you get a flat tire? It is a life altering experience. And someone who has never carried debt, never been in that downward cycle, has no idea the kind of emotional pressure that that puts on. So when you have that, you’re inundated with these commercials with predatory lenders, and you think, oh, here’s the easy 1-800 solution. And that’s the exact opposite direction you need to go.

MCCLARY: Well, I think in terms also, you talked about the shame of debt. One of the things that drives people into the hands of these predatory lenders is the fact that they don’t want to go to a lender that’s going to give them a rejection. Or, they don’t want the possibility of rejection. So, they go where there’s the easy yes. And they see that in these predatory lenders. Don’t worry about your credit score. Don’t worry about your income. Come to us. We’ll give you the loan, and we’ll make it fit your budget.

ABERMAN: So it sounds to me, first of all, we should acknowledge that the best way not to get yourself over your skis, with respect to debt, is to treat debt as any spending. And the hard fact is, if you don’t have enough money. You may not have enough money. And that stinks. But borrowing doesn’t mean you have more money. Borrowing just means that you hope to have more money in the future. So, there’s an educational aspect to this week as well.

But once the horse has left the barn, and you’re in the situation, you’ve got to get over the shame. It sounds almost like an alcoholic. I’m an alcoholic. I have an addiction. But I’ve acknowledged the problem gone. But more to the point, when I’ve reached that moment, how do I not fall into this trap? Do I go to the National Foundation for Credit Counseling website or their approved providers? I mean, how do I make sure that I’ve got somebody to help me work this problem, so that I can make my situation better, not worse?

MCCLARY: I think visiting the NFCC website is a great start. People that go to nfcc.org, they can find a counselor who can talk to them, who can work through the situation in a way that’s not judgmental. They’re not going to be further shamed about their debt. They’re going to learn more about their present situation. And they’re gonna realize that there might be options that they hadn’t considered. It’s like being in the fog of war. There’s the shame, but there’s also all the stress, and the fear that comes with carrying certain debt loads.

ABERMAN: So what’s the idea of a provider that I can trust? What am I looking for? Somebody who I can trust to help me. What are they going to do for me that’s going to signal that they’re not taking advantage of me?

MCCLARY: Well, they’re going to give you financial advice before dipping into your pocket, is one thing. They’re going to sit down with you. They’re going to conduct a thorough review of your budget. They’re going to ask you questions. They’re going to give you advice for things that you can do on your own.

STEELE: And there are red flags, too, let’s not forget those. Those red flags would include asking for money upfront. That should not happen. Asking for them to stop making payments altogether. That should not happen. Also, making sure that that’s not a high pressure sales piece. You want to be able to think about what the options are. You want to be able to talk to someone who’s willing to take the time with you. You want to have some options around how to put a budget together. Those things take time and patience. So, don’t rush.

ABERMAN: The key underpinning this is, there are people, there are groups that are not for profits, that exist in this country, where people will take the time to help individuals without reaching into their pocket or trying to sell them something. And that’s what we’re really getting at. If you don’t have an accountant or an uncle or somebody who is financially adept, you can find an objective person if you use the Internet properly, and are careful about these red flags.

MCCLARY: Yeah, that’s what nonprofit credit counseling is all about. And just as Rebecca mentioned, you definitely want to stay away from the ones that are going to be asking you for fees up front, too, and promising things they can’t successfully do for you on your behalf, that leave you in a worse situation. But the main thing is just to be getting advice from a nonprofit credit counseling agency. It just means that you’re getting an action plan that fits your unique situation, that you’ve spent time with a financial professional who’s not looking out for their own interests, but they’re advocating on your behalf. And it gives you a safe space to talk about your debt without the cloud of shame. It gives you a safe space to identify solutions. And it gives you a pathway out of debt that is realistic, based on your capability and your capacity to complete a particular option.

STEELE: And by the way, in addition to that, I think it’s really important that credit counselors are free. So, somebody is already in a bad shape with their debt. They need to talk to someone that will be patient, and then will not charge them for that upfront, and really set them on a pathway to success. And the other thing to keep in mind is, success is sort of like a New Year’s resolution. You have to stick to it. You can’t take it, you know, just for January. This takes months and months to get out of debt. And you have to be patient, and have someone there along beside you to help you with that stress.

MCCLARY: And in a lot of these programs that are offered by the debt settlement companies, they’re only things that are short term solutions, if they even work. And the difference there is that you find a person who goes to a debt settlement company, they may end up back in the exact same circumstances after they go through that, because what was missing from that was the financial education piece, was the counseling piece, was the advocacy, to help ensure that the person is better prepared to avoid falling into circumstances like that again.

ABERMAN: The key here is that taking on larger and larger amounts of consumer debt is not a story that ends well, because the bankruptcy laws are not structured to allow you to walk away. The financial system and credit reporting is not designed to allow you to walk away. So if you take on this debt, at some point you have to manage it down. Otherwise, you’re penalized. Richard, you’ve been edging toward the microphone for a little while now.

LEVICK: A couple of thoughts. One, Rebecca said something so critically important, which is: when you need help, you shouldn’t be charged for it. And the NFCC is there, and its chapters all over the country, locally, to help you. And there really are a godsend, if you’ll forgive it, it’s the Church of the Financial Redeemer, because they’re available to help. And you should be able to find someone, whether it’s the NFCC or someone else who’s not making money off of your situation. The question I have for the folks from the NFCC is: what should the banks be doing to help, or what can they do? You know, the banks want to give credit cards. They want people to pay over time. They don’t want the predatory counselors involved, because it doesn’t end well for their customers, and it costs them more. So what can the banks be doing to help you, and help their customers?

STEELE: Well, that’s a great question, and something that we think about every single day. Because the banks need to be partners with the NFCC. We have, since 1951, worked closely with the banks. But there’s an important point here. We’re not working for the banks. We are working for consumers, helping them get out of debt, being advocates for them. But the banks have a critical position here where we need their cooperation, we need their insight, their intellect, their help. And they’re pushing toward producing ways that consumers can get out of debt when there are life events, or when they’re struggling with those payments. And I will tell you, lots of banks are working with us. So if you’re a consumer and you’re in debt, you should not be afraid to call the NFCC, or go online and email us. We’ll get right back to you immediately, because we are going to work with your bank to make sure that you get taken care of. Bruce, anything else on that?

MCCLARY: Yeah, I think you said it exactly the way the way it is. I mean, I think the banks are already taking a leadership position, in many ways, to support NFCC. There’s much more work to be done. And I think there’s a lot of room for the banks to come along on that journey and help protect consumers to find safer solutions for them to get out of debt.

ABERMAN: The important point for all of us listening and here in the studio today is that debt is something that can be a great tool. It can also be a great challenge. It could also be your undoing. It’s a tool that should be used carefully. The good news is, there are rules for helping you manage if you have gotten over your head, and take advantage of the resources like the National Foundation for Credit Counseling, to solve these problems.

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