If you’re struggling with past due debt, you may feel overwhelmed at the thought of how you will resolve it. Opening statements on past due balances, answering calls from debt collectors, and trying to figure out how to get back in good financial standing may feel overwhelming. Especially because when it comes to the subject of debt, there is a mountain of good and bad information readily available. While the thought of being debt-free may seem impossible, it is achievable. An important part of achieving financial freedom is understanding the benefits of resolving outstanding accounts. The goal of this article is to provide 5 of the most important answers to the common question, “Why should I resolve my debt?”
1. Stop Interest From Accruing
Resolving your debt stops interest from accruing. Most types of debt have an Annual Percentage Rate (APR), which can be fixed (stay the same over the life of the account) or varied (change over the life of the account). Interest causes unpaid balances to increase the longer the account remains unpaid. There are a few factors to consider when it comes to how much interest your account will accrue over time:
- The higher the interest rate, the greater the interest “accrues” or builds up.
- The higher the principal balance, the greater the interest accrual.
- Even when making the minimum payment, interest can continue to accrue.
- On some accounts, interest may compound. When it comes to building up your savings, compound interest can be a wonderful thing; But when it comes to debt, compound interest works against you because the unpaid principal balance plus accrued interest are combined into a total balance accruing interest.
If your account is accruing interest, one benefit to resolving your debt sooner rather than later is that you’ll likely pay less in total. The balance may be much higher months or years down the line. That’s why it’s important to know your interest rate and work with your collector to determine an effective payment plan for tackling the balance.
2. Grow Your Savings
Part of establishing good financial health is growing your savings, but money going toward debt payments is less money available for saving. Most experts recommend having, at a minimum, an emergency fund of $1,000. Bills are inevitable, but when you’re able to reduce the bills to a manageable percentage of your income, you’ll have more income available for savings. Resolving your debt can ultimately help you grow your available income, putting more money in your pocket over the long term. Keep in mind that paying debt with credit is generally not recommended if you can avoid it as it continues the cycle of debt and can lead to further complications.
3. Prevent Garnishments & Release Liens
If you were sued and a judgment has been obtained against you for your debt, you could experience a garnishment placed on your wages or a levy placed on your bank account. There are many federal and state regulations on this subject, so it’s important not to panic or to interpret this information as a scare tactic. Do your research but keep in mind that garnishments and executions are sometimes legal recovery options used by collection firms to assist creditors in recovering unpaid accounts. A lien can be placed on your property or taxes. Examples of these liens are on the deed to your home similar to a federal tax lien. In the case of home liens, having a lien on your home can get in the way of selling your home in the future as you would need to resolve your debt to have the lien released. If a judgment, garnishment, or lien occurs, you will be notified in advance at which time you can contact your creditor directly to discuss your available options. A major benefit to resolving debt is to prevent or stop garnishments or executions from taking place.
4. Improve Your Credit Score
Resolving your debt can improve your credit score. Depending on factors such as the age of your debt and whether or not your creditor reports to the credit bureaus, your account may be affecting your credit score. Credit scores are important because they are what lenders and creditors use to determine your creditworthiness. Your score can either help or hurt your efforts to qualify for new lines of credit with reasonable interest rates for a mortgage, car loan, credit card, or personal loan. Keeping a healthy debt-to-income ratio and paying on time allows many consumers to maintain a strong credit score.
It is recommended that you review your credit reports regularly. You do not have to pay for a credit report; Equifax, TransUnion, Experian provide consumers one free credit report every 12 months (upon request). These are available all in one place at AnnualCreditReport.com or on the individual bureau websites. Also, some banks provide free credit score monitoring without additional cost.
5. Reduce Your Stress
Unresolved debt can cause significant stress and anxiety. Resolving your debt can help reduce some of the worries that may be hanging over your head. Calls or letters from collectors or courts are generally not communications anyone wants to receive, but remember that the people attempting to collect on your overdue account are typically just regular people doing their jobs and working to earn a living. Creditors and collection agencies want to help you reach an amicable resolution, and payment plans or settlement options are often available. If you are stressed because you believe you do not owe your debt, you are the victim of identity theft, or you are experiencing extreme financial hardship, reach out to your creditor or collector directly as soon as possible.
How Can I Resolve My Debt?
Everyone’s account details and life situations are different. It’s important to do your research and come to an informed decision that fits your specific situation. This information is not meant to provide an answer for every scenario but should help provide direction for getting started on your path to debt resolution.
In the case of multiple debts— when determining which debt to resolve first–it’s a good idea to compare interest rates as well as total balances. Every situation is unique, but in general, it usually makes the most sense to pay off high-interest debt before diverting income to savings or investments. There are also many free interest calculators available such as this “Credit Card Roll-Down” calculator from the American Institute of CPAs. If you’re thinking about consulting with a financial counselor, be sure to get informed and use caution, especially when it comes to debt consolidation.
When it comes to your finances, remember to keep your eyes on the big picture. Sometimes credit can be a tool for growth, but too much debt– especially delinquent and/or high-interest debt– can damage your financial health. Fortunately, the damage doesn’t have to be permanent. Pruning your budget, increasing your financial literacy, and rooting out burdensome debt are some ways you can start to make the soil of your financial health more fertile for future growth.
To access free consumer resources that can help you with understanding credit, debt, budgeting, and personal finances, please visit the Consumer Resources on the Northwood Asset Management Group website. If you have an account with NAMG and have questions or need help with making a payment, please call a member of our team at 855-200-5999. Our Customer Service Representatives are available Monday-Thursday 8:30am-7pm and Friday 8:30am-5:30pm Eastern Time.
About Northwood Asset Management Group
Northwood Asset Management Group is a nationally licensed third-party debt collection company headquartered in Williamsville, New York. Our company provides professional and reliable debt collection services to creditors who are seeking to resolve outstanding accounts with consumers. On behalf of our clients, we contact consumers by mail and telephone in our attempts to find an amicable resolution. Through respectful communication, we build trust and develop long-term relationships with our consumers.
We comply with the Fair Debt Collection Practices Act, or FDCPA, and all other state and federal laws that apply to the collection of debt. We hold ourselves to a strict compliance standard, and we are committed to conducting business with honesty and integrity. We are active members of ACA International and Receivables Management Association International. We understand that the recovery of creditor’s accounts receivables is dependent on our professionalism and knowledge of processes and procedures. Northwood Asset Management Group treats consumers with respect and abides by our high ethical standards and practices that guide our everyday interactions.