Almost every American owes money. A recent study showed three out of five Americans carry credit card debt. According to debt.org, the most non-mortgage debt is carried by people 40-49 years old. It also indicates the wealthier people are, the greater the probability they owe money. It is likely you have clients who carry debt from month to month. Some might even live on credit. Advisors are associated with managing assets, not liabilities. Advising on liabilities is within your financial planning skillset. How do you advise them?
1. When to have this discussion? “How much do you owe on credit cards?” can sound as awkward as asking “How much do you weigh?” If your annual reviews for your client include preparing a net worth statement, it is a logical question to ask along with more upbeat questions like: “Estimate the value of the real estate you own.” Now the advisor has an idea of the size of the clients’ debts.
2. Do they know how much they owe? This can be a surprise to the client. They have mortgage debt. Their monthly mortgage payment coupon likely lists the remaining principal on the loan. They might have several credit cards with balances that each do not raise eyebrows but total up to a large amount. What about their home equity loan? Do they have a margin debit? Your client might not have seen the liability side of their life in aggregate form.
3. Is all of the debt theirs? This might sound silly. Of course it is theirs! Whose else might it be? Have they authorized an additional charge card for a family member, like a student in college? How much as they spending? If a boat is taking on water, a good step is determining how many leaks need to be plugged.
4. Do they review their credit card statements on a regular basis? Credit card fraud is a big issue. According to security.com, 65% of credit card holders have been victims of fraud during their lifetime. That’s about 127 million Americans. Clients need to review their statements for unfamiliar charges. It has been said thieves start with small transactions to see if they are picked up. If not, they move on to larger amounts.
5. Do they have a plan for paying it back? Owing money is not always a bad thing. It allows people to buy homes, gradually paying down the mortgage. If you make monthly mortgage payments or sell your house, you have a plan for paying down the loan. Does the client have a plan to pay down those credit card balances?
6. Do they know the cost of carrying their debt? Interest rates are printed on monthly credit card statements. Forbes reports the average rate credit card interest rate is 27.91% (2/12/24). This can be eye opening for clients. They are probably thrilled if their stocks return 10% annually over many years.
7. Where does their debt come from? Their mortgage might be their biggest loan. They might have a home equity line of credit (HELOC) too. Their car loan might be 6–7%. Credit card rates were discussed earlier. Some debt interest is tax advantaged. Other interest charges, like credit card debt, is not.
8. Can they get a cheaper interest rate? This involves shopping around. You can help. They might be able to transfer their balance and get a lower introductory rate for a set time period. If your firm is connected to a bank, you might offer a lower rate. You need to provide several choices and a “next steps” roadmap.
9. Can they pay off some of their debt now? Some people sit on much more cash than they will ever need. They might not consciously avoid paying down debt. The revolving charge card balance crept up because they only made minimum monthly payments. You might consider the easiest way to get a 20% return on your money is to stop paying someone 20% on money you borrowed by paying down the debt with extra cash.
10. Are there any “time bombs” lurking out there? Balloon payments are one example. Your client might have an interest only mortgage loan that requires repayment or refinancing on a specific date. They might have borrowed money from a relative with the understanding it was only for the short term, and they must pay it back. Where will the money come from?
11. Do they qualify for any debt relief programs? The government has programs to forgive portions of student loan debt. This might be tied to a specific profession. Some employers offer student loan debt repayment programs as a benefit. This might be a matching payment and limited in the amount they can contribute. Clients should do some research to determine if they qualify.
12. Do they get an annual bonus? Where does it go? There is an expression, “Money talks. It says goodbye.” Many people have their annual bonus spent “in their head” before it arrives. Debt stays with you forever unless it is paid down. Lump sums like an annual bonus or tax refund present an opportunity to pay down debt.
Helping clients in this area strengthens the relationship. It can save the client money, enabling them to save and invest more. You should bring up debt in conversations with clients.
Bryce Sanders is president of Perceptive Business Solutions Inc. He provides HNW client acquisition training for the financial services industry. His book Captivating the Wealthy Investor is available on Amazon.