Debt perceptions are influenced by individual income levels and credit standing.
Contending with Debt Inequality: A Modern-Day Dilemma
In today's world, the chasm of income disparity isn't the only divide we grapple with. Our financial landscape is marred by a seldom-discussed yet widespread issue—debt inequality. What you earn and owe plays a significant role in determining the ease or difficulty of escaping debt.
Take, for instance, the findings published in a recent research by two major lenders. Santander discovered that more than three-quarters of middle-income Americans feel they are on the right financial path and are keeping up with their bills. On the other hand, only 19 percent of those with sub-620 credit scores think their debt is manageable.
Plunging into the Debt Inequality Quagmire
This predicament isn't surprising. As income and credit scores decrease, the options for extricating oneself from debt's clutches diminish.
A look at statistics reveals that over one in ten credit card holders were making only the minimum payment toward their debt in the fourth quarter of 2024, the highest rate the Federal Reserve Bank of Philadelphia has recorded since it began tracking the data point 12 years ago.
Lower-income earners aren't the only ones amassing credit card debt, but their high-income counterparts have more time and resources to plan their way out of it.
The Santander survey showed that of the middle-income respondents who were contemplating taking out a personal loan, a majority were tracking interest rates, planning to apply for a consolidation loan if rates decrease, and aiming to secure one in the next 12 months. The luxury of time and strategy is often unavailable to low-income individuals who need immediate solutions to their financial predicament.
The Faces of Subprime: Mixed Fortunes Amid Struggle
A cursory glance at the subprime segment might paint a dismal picture. More pessimistic research reveals that approximately 61 percent of respondents with excellent credit (scores above 760) consider their debt manageable, while only 19 percent of those with poor credit (below 620) share the sentiment.
However, a closer look at some subprime borrowers paints a different picture. Recent research highlights strategies used by consumers who successfully paid off their once overwhelming debt, such as:
- Working a second job or side hustle (36%)
- Employing the snowball debt repayment method (26%)
- Using a budgeting app (23%)
"I am encouraged by the number of consumers who said that they have paid off their unmanageable debt," Rod Griffin, senior director of public education and advocacy at Experian, says. "There is a lot of uncertainty right now, and it's easy to focus on the negatives, but consumers are still taking steps to reach their financial goals."
Pulling Yourself Out of Debt's Grip: A Guide for Struggling Borrowers
Despite the grim statistics, there's hope for those struggling with debt. Regardless of your credit position, understanding your options and taking action is crucial.
Here's a roadmap to help:
Engage Your Lenders
Open a dialogue with your lenders if you fear you might default or are already delinquent. Share your situation and learn about potential solutions. Personal loan lender Discover, for example, allows some struggling customers to lower their monthly payments, extend their repayment term, or remove a delinquency status by making three on-time payments.
Seek Assistance
Don't go it alone. Reach out to representatives from nonprofit credit counseling agencies who could recommend a debt management plan or a debt lawyer who suggests debt settlement, among other options.
Update and Optimize Your Budget
The notion that it's too late to start budgeting is a myth. Creating a budget will help you organize your debts and prioritize them alongside other expenses.
Choose a Repayment Strategy
Regardless of the repayment plan you choose, persistence is key. Some borrowers have found success with rewarding themselves each time they hit a payoff milestone. Whatever works for you, stick to it.
Stay the Course
The road to debt freedom may be long and arduous, but with the right guidance, diligence, and perseverance, you can emerge with a clean slate.
- In light of the challenges associated with debt management, it's essential for struggling borrowers, regardless of their credit positions, to engage their lenders, seek assistance from nonprofit credit counseling agencies or debt lawyers, update and optimize their budgets, choose a repayment strategy, and maintain persistence throughout the repayment process, in order to successfully pull themselves out of debt's grip.
- As evidenced by the strategies employed by some subprime borrowers who managed to pay off their overwhelming debt, tools such as budgeting apps, side hustles, and the snowball debt repayment method can play crucial roles in navigating the debt inequality quagmire, offering hope for those grappling with unmanageable debt.
