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Military service members and veterans guide to managing debt

By Andrew Housser
Andrew Housser is co-CEO of Freedom Financial Network, LLC and its subsidiary, Freedom Debt Relief, a national consumer debt resolution firm that has served more than 40,000 clients.

Each year on Memorial Day, Americans remember the troops who have died serving their country. At the same time, many Americans celebrate the traditional values of family and community, and honor current military service members for their hard work protecting our nation.

However, even as we remember, many current military service members and veterans struggle with financial debt. In fact, recent surveys have found that 56 percent of enlisted service members report that they have financial difficulties, and almost half -- 40 percent -- do not feel that they are in control of their debt.

Money problems are serious for service members. They can impact the ability to add or maintain a security clearance, affecting military or civilian employment. If your job requires a certain security clearance that you can't attain, you could be reclassified or even discharged. In the military, debt even can be considered a "dishonorable" condition. If you are in debt trouble, it is important to take action now.

Live within your means

First, spend less than you earn. Get out of the mindset that you can buy anything you want and pay it off later. Instead, stick to a budget, and use cash or a debit card for daily purchases. Put credit cards in a safe (hard-to-reach) place, cut them up if you must, and delete card numbers from online shopping sites to eliminate temptation.

Pay what you can

Ultimately, you want to pay off credit cards every month and live debt-free. Meanwhile, to pay down existing debt, pay as much as you can on your debt that has the highest interest rate. Stay current with other debts by making minimum payments. When the first debt is repaid, use the same strategy on the next-highest-rate debt. Always make payments on secured debts (mortgage, car) first.

Save something

Fortunately, savings is an area where service members might be outpacing civilians. A recent survey showed that middle-class military families save more for retirement, long-term and short-term goals and do more to pay down debt than civilian families do. Whatever you do, save a little something, even if only $10 a week. You will gradually prepare yourself to cover emergencies, and you'll gain confidence in your financial security.

Shun short-term loans or payday loan services

Even though a 2007 law limits the interest rate payday lenders can charge service members to 36 percent annually, think twice before using one. Payday loans can be difficult to pay off and can create an unhealthy cycle of debt. Instead, seek an alternative, borrow from a trusted friend or relative (with documented arrangements to pay them back), or even take a loan or credit-card cash advance if you must. Then, it is important to rework your budget so you will not run into the same problem again.

Take advantage of military resources

Military personal-finance counselors can help you put your money issues in order. Military aid societies can help you manage money or even refinance expensive loans.

Get help with education costs and student debt

In August 2009, Congress passed a new GI Bill that can help military veterans pay for their educations. The former GI Bills are still in place, however, and might be more beneficial to some veterans. To get educational assistance, you will have to choose one of the bills, and the Veterans Administration has created a website to help veterans choose the right benefit. If you have existing student loans that are difficult for you to pay, the nonprofit Leave No Veteran Behind might be able to help.

Speak to creditors

Handling debt yourself is always the best option, as it is most beneficial to your credit score. If you cannot make minimum payments, try calling credi­tors and ask for temporary hardship status. Some creditors may work out payment plans with you. Creditors do not have to negotiate, but it is often in their interest to do so, since it makes it more likely that you will eventually repay them.

Get help

If you are carrying serious debt and cannot even make required minimum payments, consider getting help. Debt consolidation, one alternative, combines multiple debts into one larger loan. Debt consolidation services usually ask consumers to make one monthly payment, which is used to pay creditors. Consumers pay back 100 percent of the debt, plus interest. Additionally, the loan is usually secured by the borrower's property, such as a home or car, which puts those items at risk if the borrower cannot pay.

Debt management companies, also known as credit counseling agencies, agencies, maintain pre-arranged agreements with credit card companies to lower interest rates on a consumer's existing debt to a creditor-issued "concession rate." Debt management companies collect a monthly fee from consumers, as well as revenue from the credit card companies called "Fair Share" payments. Debt management plans reduce monthly payments, but not the principal amounts owed.

For consumers with more serious debt problems, debt settlement firms work on their behalf to lower principal balances due. They can often obtain savings of 50 percent of the total debt by negotiating directly with creditors while the consumer accumulates funds for the settlement. Firms charge consumers a fee for their services, typically a percentage of the debt enrolled or of the debt reduced. It can damage a credit rating, but less so than filing for bankruptcy.

As with any type of discipline, facing up to unhealthy debt actually provides great freedom. Don't waste time worrying about your debt. Instead, act now to move toward healthy personal finances.