- 4 min read
- Avoid a loan consolidation -- it will not solve your problem.
- Consider a hardship program if your credit card issuer offers one.
- Credit counseling is a great idea if you want to keep a high credit score.
- Debt settlement solves your credit card debt quickly
Four Proven Ways to Beat Your Credit Card Debt
Can’t make your credit card payments? Do not despair, you have four options to handle this debt. This article introduces a do-it-yourself option, plus three options where you get professional help to solve your credit card payment problem.
Before we look at the four proven options, let us look at one that will probably not solve your credit card problem — a loan.
Start with several assumptions: The interest rate on your credit card accounts is between 12% and 25%. The national average is somewhere in between today. If you are considering a personal loan, the interest rate on signature loans is between about 11% and 25% today, and the longest term we have seen for a signature loan is 5 years. Therefore, assuming you would qualify for a signature loan, your monthly payment amount would be greater than your monthly credit card payments today.
Trading your credit card balances, which are a form of loan, for another loan usually does not make sense for most situations. However, for people who own property with equity and have an excellent credit score, then consider a cash-out mortgage refinance.
Focus on either cutting the interest rate, or getting rid of all or part of your balances. This article discusses four proven options for cutting your interest rate, balances, or both.
1. Hardship Program
Major credit card issuers offer hardship programs for their customers. However, not all publicize their existence, and they vary in length. Before you call your credit card issuer and ask about a hardship program, make sure you understand all of your options and the possible downside to entering a hardship program.
Issuers do not publish the terms and conditions of hardship programs. The only way to learn if your issuer offers a hardship program is to call a customer service representative and ask. Some hardship programs close the account as a condition of entering the program. Others will allow continued use of the account. Ask about this important detail. Because issuers do not publish the terms of hardship programs, they may vary by each customer and their circumstances.
The huge advantage of participating in an issuer's program is you may see your interest rate fall to almost zero. This will help you speed your way to debt freedom because almost 100% of your payments go towards paying down the principal. Also, you are not subject to any fees.
The credit score impact of a hardship program varies with each plan. Ask about this detail before agreeing to enter a hardship plan.
2. Credit Counseling
Credit counseling is somewhat similar to hardship programs. A credit counselor will contact a consumer's creditors, which are usually credit card companies, and will ask for what is called a "concession" interest rates and a 5-year payment plan. Credit card issuers often subsidize credit counseling service providers with payments called "fair-share."
The advantages to credit counseling are preservation of your credit score. If your credit score is of paramount concern to you, then credit counseling is your best and only proven option to debt consolidation.
3. Debt Settlement
This is a much more aggressive strategy than hardship programs or credit counseling. In debt settlement, you stop paying your credit card bills. That's right, stop. Instead, your deposit funds into a special account every month. After six months or so, and depending on how much you can afford to deposit, a negotiator at a debt settlement company will negotiate lump-sum settlements on your accounts with the enrolled credit card issuers.
Debt settlement attacks the balance of your accounts, and pays off a fraction of the total amount due. How much you save on your balance depends on the creditor, and how much you can deposit into your special account consistently. The usual time to freedom is three to four years, but this varies.
The downsides to debt settlement are two: First, it causes a negative impact to your credit score. Second, not paying your credit card balances as agreed opens you to possible litigation from the credit card issuers. However, if your credit score is already suffering due to late payments, then the impact of debt settlement will be less. Also, although litigation is possible, it happens rarely.
The grand-daddy of debt consolidation is bankruptcy, a legal process so old it is actually written into the US Constitution. Bankruptcy is a court-supervised process where some or all of your debts are discharged. Two forms of bankruptcy, called "chapters," are common for most consumers. Chapter 7 discharges all of the qualified debt. Chapter 13 puts you in a court-supervised payment plan that lasts 5 years. At the end of that time, the remaining debt may be discharged, depending on the circumstances. See the link just mentioned to learn more about bankruptcy.
It may be tempting to want a debt-consolidation loan to handle your credit card problem. However, even if you could find a loan to consolidate your debt into one payment, it is likely that one payment would be as much as or more than you are already paying every month.
Therefore, your wisest course of action is to look at other solutions. See the links we shared here to learn more about the choices available to you.
Struggling with debt?
Debt is used to buy a home, pay for bills, buy a car, or pay for a college education. According to the NY Federal Reserve total household debt as of Q2 2022 was $16.15 trillion. Auto loan debt was $1.50 trillion and credit card was $0.89 trillion.
A significant percentage of people in the US are struggling with monthly payments and about 26% of households in the United States have debt in collections. According to data gathered by Urban.org from a sample of credit reports, the median debt in collections is $1,739. Credit card debt is prevalent and 3% have delinquent or derogatory card debt. The median debt in collections is $422.
Each state has its rate of delinquency and share of debts in collections. For example, in South Carolina credit card delinquency rate was 4%, and the median credit card debt was $402.
Avoiding collections isn’t always possible. A sudden loss of employment, death in the family, or sickness can lead to financial hardship. Fortunately, there are many ways to deal with debt including an aggressive payment plan, debt consolidation loan, or a negotiated settlement.