Millennials are often categorized many different things. They’re the dreamers, the snowflakes, the wanderlusters, the mobile phone-addicted, the feminists, the hipsters, generation debt, or whatever other of the countless overgeneralized buckets one can think of.
Instead of that last one though, what about the ‘financially setup to fail’ generation? After all, schools put a greater focus on algebra, something 99.9 percent of people will never use in their life, over uniformly important life skills like financial literacy. That, combined with an increasingly expensive cost of living in most urban hubs and exorbitant college tuitions, makes it all seem like a sick joke. While education can’t erase already accumulated debt on its own, it can improve our long-term financial outlook and ensure we don’t make the same mistakes again.
Here are seven debt-related concepts Millennials (and everyone else) needs to know:
The principal is the amount you initially borrow through a loan or spend on a credit card. The principal is what the interest is calculated off of. When principals are too high, this necessitates long-term debt, as the interest and fees continue to add up the longer the principal balance lingers. However, keep in mind that having a high principal on an asset like a home or student loan is much different than a credit card, which offers much higher interest rates.
Interest is synonymous with “extra.” If you’re paying interest on something, then you’re paying extra. That doesn’t mean you’re getting a bad deal, of course. If you take out a loan, it’s reasonable to expect to pay interest on it since you’re getting access to a large amount of money that’s not yours. In the case of a mortgage, it makes sense to pay more through interest because very few of us have enough money to buy a house outright. But, again, paying interest on credit cards, which can carry APRs (annual percentage rate) as high as 25 percent, is unwise. The current APR national average is just under 17 percent.
- Debt Relief
Debt relief is an umbrella term used to describe various strategies related for getting out of crippling debt. Debt relief can entail a DIY approach or involve working with a company to provide assistance.
- Debt Management
When you feel yourself falling behind with creditor payments, it’s wise to be proactive in reaching out to creditors. Debt management plans can be done by a debtor or company and aim to reduce monthly payments, interest rates, late fees and any other penalties that make it harder for a debtor to pay back their debt. Many creditors oblige, as at the end of the day, they want their money.
- Debt Consolidation
Sometimes so many accounts are opened with varying interest rates and guidelines that a person loses track of managing them and their debt spirals out of control. When this happens, debt consolidation can be a viable strategy. Debt consolidation aims to make a person’s debt more straightforward by taking out one large loan with a lower interest rate to pay back the various balances. This creates one balance to pay back and helps many debtors get back on track with their payment.
- Debt Settlement
Debt settlement usually involves a debtor enlisting the help of a company to negotiate their debt down. The debtor enlists the help of a debt relief company to “give up the reins” in during this stressful transition out of the proverbial red. There are several companies that offer debt settlement, but make sure you research wisely.
The company you choose should be transparent about their process and never promise to eliminate a specific amount of your debt. They also shouldn’t charge you fees until after they settle a debt and you agree to it. Understand more about the process by Googling around for Freedom Debt Relief Reviews and write-ups various reviews sites.
Bankruptcy is often referred to as a “last-resort” option because of the effects it has on your credit score and the process one must go through in terms of hiring an attorney and going to court.
The main types of personal bankruptcy are chapter 7 and chapter 13. Chapter 7 provides a way out for debtors who cannot pay back their debt, though they must surrender most or all of their personal assets. Chapter 7 can stay on a credit score for up to a decade. Chapter 13 requires a debtor to make court-ordered payments for 3-5 years in exchange for debt relief and continued possession of personal assets.
Debt isn’t just money owed, it’s life-altering. But no matter the financial situation you currently face, there’s a way out with diligence and a positive outlook. It also helps to be aware of financial concepts and strategies like the ones above.