Older adults who find themselves getting behind financially may need credit counseling and a debt repayment plan.
More seniors than ever before are carrying debt into their retirement years. According to the Survey of Consumer Finances, senior households with debt increased from around 50 percent in 1989 to just over 61 percent in 2013. We live in a world with easy credit, where most of us have some kind of debt—whether from home or car loans or credit cards. However, debt is more worrisome for older adults, especially those living on fixed incomes, because we are also dealing with increased medical costs.
In fact, medical debt is the most common debt among seniors (National Council on Aging (NCOA)). More than 84 percent of people aged 65 and up are coping with at least one chronic condition, and often more as they age. A study in the Journal of General Internal Medicine revealed that out-of-pocket medical expenditures in the five years prior to an individual’s death totaled more than $38,000, leaving 1 in 4 seniors approaching bankruptcy.
Another common source of debt among senior households is credit cards. In 2001, approximately 27 percent of such households held credit card balances. By 2013, more than 32 percent did, with 1 in 4 households carrying a balance of at least $7,200. In one survey, professionals who deal with seniors reported that unmanageable, overdue utility charges also contributed to financial problems.
The issue with debt is that an increasing amount of income must go toward paying off the interest. That means many seniors are shortchanging themselves on necessities such as medications, food or home repairs that can cause problems down the road.
Some financial advisers recommend paying off all debt before heading into retirement, although others say it’s a trade-off between using that money for investments and paying down debt. Most experts don’t see mortgages as a problem (unless you’re paying a higher interest rate than is available), because homes can be an investment.
Questions to Ask a Credit Counselor
Ask the right questions to make sure the credit agency is reputable and offers what you need:
If you are struggling with debt, a good first step is to consult with a credit counselor, especially if you pay more than 20 percent of your income to cover debt payments. Credit counseling costs vary, but some nonprofits offer the service for free or at discounted rates.
A good credit counselor can help you organize your finances and develop a budget, and offer free educational materials and workshops. Your credit counseling agency may recommend that you enroll in a debt management plan (DMP). In a DMP, you make monthly deposits with the credit counseling organization, which uses your deposits to pay your unsecured debts, like your credit card bills, according to a payment schedule. In return, your creditors may agree to lower your interest rates or waive certain fees. This is a long-term commitment as it could take 48 months or more to complete your DMP.
Many counseling agencies are nonprofit, but be aware that “nonprofit” status doesn’t guarantee that services are free, affordable or even legitimate. A reputable credit counseling agency should send you free information about itself and the services it provides without requiring you to provide any details about your situation. If a firm doesn't do that, consider it a red flag and go elsewhere for help.
To find a reputable credit counseling agency, do your homework first. The National Foundation for Credit Counseling (NFCC), founded in 1951, is the nation’s largest and longest-serving nonprofit financial counseling organization. You can get a list of approved credit counseling agencies from the U.S. Department of Justice. The National Association of Area Agencies on Aging can also connect seniors to local assistance.
Once you've got a list of counseling agencies you might do business with, check out each one with your state Attorney General, local consumer protection agency or the Better Business Bureau, which lists agencies that are accredited. The United States Trustee Program also lists credit counseling agencies approved to provide pre-bankruptcy counseling. After you've done your background investigation, interview the final candidates. See the sidebar, “Questions to Ask a Credit Counselor.”
Making a Budget
You can create your own budget using NCOA’s calculator. Creating a budget of your income and expenses can help you determine how much more you’ll need each month to pay down your debts, plus see where you can cut back your spending. List your income sources, such as retirement funds, pensions and Social Security, and your current debts, the monthly payment and interest rate. Then look at your monthly expenditures, including food, utilities and occasional expenses such as home and car repairs.
You may have to cut back on spending, such as decreasing travel, so you can pay more toward your debt. Or, you may have to increase your income by taking in a roommate or selling a car, RV or vacation property. If the situation is drastic, you may have to move to a smaller house or apartment.
The most logical approach to paying off debt is to first pay off the debts with the highest interest rates, while making minimum payments on the rest. However, there’s a satisfaction in getting rid of a smaller debt, even one with lower interest rates, which can spur you to eliminate other debts. NCOA provides a debt calculator to help you figure out how long it will take to pay off debts.
If you are paying high rates on auto, student or credit card loans, consider consolidating your debt in a lower-interest home equity loan or by refinancing your mortgage. Your new interest rate should be lower and tax-deductible. But take this step carefully, because if you can’t make the payments, you could ruin your credit and lose your house. NCOA reported that last year’s average interest rate on a mortgage was 3.5 percent and on a credit card a whopping 14.5 percent, so consolidation can make financial sense.
Another possible source to pay off debt is your retirement funds, but that money is usually taxable. Plus, experts warn against depleting your retirement savings or 401(k). You could also take out a lower-interest rate personal loan to pay off your higher-interest rate debts.
You also could contact your creditors and ask for more time to make payments. If you think you are paying too much interest, request your credit score and find out the typical interest rates for people with similar scores. If you have a hardship, ask your lender or a legitimate credit counselor about forbearance, a plan that freezes your account and sets up automatic monthly payments.
Lastly, always watch out for debt-collection scams that prey on people in financial trouble.
“Debt,” National Council on Aging .
“5 Steps to Dump Debt During Your Senior Years,” July 2, 2015 U.S. News: Money.
“Senior Citizen Debt Assistance,” LovetoKnow.
“Dealing with Debt,” LovetoKnow.
“The Silent Struggle of Seniors With Debt,” Feb. 26, 2015, Reuters.
“Choosing a Credit Counselor,” Federal Trade Commission.
Blog posting provided by Society of Certified Senior Advisors