 Credit Card Debt
Get Out of Debt and Take Back Your Power
If you feel like your credit card payments have you backed up against a wall, there are steps to help you manage your money. Money management is the key to escaping from debt. No matter how irregular your income is, or how broke you are, it is better to face your money troubles squarely than to deny the problem. Take heart. In this country, no one is sent to prison for not paying credit card debt.
No matter how easy it is to get credit, borrowing should not be considered a way of life. Changing the way you spend money is the first step out of debt despair. In other words, you bring in a certain amount of money each month, and when it's gone, it's gone. Accepting that reality is the key to living a happier, wealthier life.
 Step 1 The List
If you are swamped in debt, borrowing more money is not the best step to take. Before you do anything else, list your financial obligations so that you know where you stand. Your list should include lender’s name, balance owed, rate of interest, late payment charges included in the balance and the minimum payment. Total up the dollars owed and all the minimum monthly payments.
How much debt is too much? If your total monthly payments, including your home mortgage payment, exceed 36% of your monthly income, you’re carrying too much debt. Credit card companies are getting rich off of you.
Step 2. The Baseline Budget
The next step is to prepare a baseline budget. This is a simple list of the money you need every month to meet your basic living expenses. Your baseline budget will include rent, utilities, car insurance, housing expenses like mortgage payment, property tax and insurance, costs to get to work, medicine, and basic food. The baseline budget total tells you how much money you need to live without any luxuries. It doesn’t include pizza, fancy food, dining out, clothing, impulse purchases, entertainment, vacations or cable TV. None of these things fit into a debt-reduction budget. Your lifestyle must be revised to include brown-bag lunches and value-priced groceries.
The purpose of the baseline budget is to remind you what you need to get by and how much of your take-home pay can be used for paying off your debt. Put your baseline budget into practice right away. The baseline budget is your first brave step to taking charge of your money.
Step 3 The Paydown
Living by a baseline budget should free up enough cash to make all the minimum monthly payments on your debt. As you make the payments, record the new, lower balance on your list of debt. Always make your payments as soon as the bill comes, because the bank charges exorbitant late fees and the interest on those late fees. If you pay more than the minimum every month, you'll get out of debt quicker and you'll pay less interest
Use the cash that’s left over to pay off the most expensive credit card balance first. You could be paying interest as high as 28% on some cards. When the balance on the first credit card is paid off, you’ll have more cash available to pay on the second highest credit card, and so on until your credit cards are paid off.
When your credit cards are paid off, focus next on car loans, bank loans and other debt. Apply all available cash to pay off the most expensive of these loans. Finally, pay off the debt with lower interest rates and income tax benefits, like student loans, and then your house mortgage.
Step 3 A Clean Slate
One of the easiest ways to get your spending under control is to eliminate your credit cards. Credit card abuse is one of the leading causes of consumer indebtedness. Eliminating credit cards from your life is a good step to control your spending impulses. Another step is to avoid any new debt or loans. Taking out additional loans is counterproductive. This includes buying anything that will require future payments. You shouldn’t buy a new car or any other item on time. Even when stores offer terms like “no payments and no interest for two years,” you are, in-fact, making a loan.
Step 4 Negotiating Your Debt Down
If you have hospital and medical expenses that you are unable to pay, you should know that hospitals routinely waive payment for people who are in financial distress. You should call the hospital and the physician’s billing service. Be prepared to explain your circumstances, whether it is a lost job, lost insurance, or misfortune. Swallow your pride and ask for help.
Negotiate Better Credit Card Terms
Credit card companies will often reduce your interest rate if you ask them. You can easily do this for yourself. Just call your credit-card company and tell them what rate you were offered in a mailer. Ask them to match that rate. Credit card companies will offer lower rates to keep customers who may be transferring their outstanding balance to another credit card company. Sometimes, customer service people are authorized to reduce your rates right there on the phone. But, if the first answer is no, ask to speak to a manager. You will have extra bargaining leverage if your payments have been on time and your credit history is clean.
If those late payment charges resulted from conditions beyond your control, you can call and request that they be subtracted from the balance you owe, along with the interest that accrued on them. If the phone call doesn’t get results for you, write a letter requesting the same thing.
Online Debt Payment Calculator
The debt planner provided by CNN Money is easy to understand and use. It will help you with your planning. It lets you choose the amount of your monthly payment, and tells you when your credit cards will be paid off. It asks for the same information on the list you prepared in Step 1 above, that is, your amount of debt, the monthly interest rate and the minimum payments required. If you want to pay more than the minimum payment, decide how much you can afford each month. The planner will tell you when the debt will be paid off and what your total cost in interest and fees will be. The planner also works for debt consolidation plans so you can double-check what the credit counselor tells you. It’s always a good idea to see what you can do on your own to repay your debt.
Get a Personal Loan
You can reduce the interest rate you are paying on your debt, by using a personal loan to pay off your credit cards. If you are employed and you have reasonably good credit, you may qualify for an unsecured loan. The available interest rate, say 10%, will be much less than credit card rates, which can be as high as 28%. Resist the temptation to borrow more than you need to pay off your outstanding loans and credit cards.
Refinance Your Home
Another way to reduce the interest rate on your debt is to do a "cash-out" refinancing. If you have equity in your home, you have the option of refinancing your property for more than the amount you owe and using the extra cash to pay off debt. You will get lower interest rates on a home refinancing, but you’ll be stretching payments out over 15 or 30 years. The total interest cost over three decades can wind up being as much as the amount you borrow, and refinancing usually can be done only once. Remember that if you fail to make the required payments, you could lose your home. Resist the temptation to borrow more than you need to pay off your outstanding loans and credit cards.
Refinance your car
Most people don't think of it, but you can use your car as collateral for a loan. The interest rate on a car loan will be much less than credit card rates. Of course, if you don’t make the payments, your car can be repossessed. If you are driving a newer car with an outstanding loan, it is likely that refinancing is not an option because the present loan balance already exceeds the value of the car.
Sell Your Home
If your house is worth more than you owe on it, selling your house will give you cash in your pocket to pay off your credit card bills. It is a hard decision, and not lightly made. Note that if you choose instead to file bankruptcy, you may be able to keep your home. Get professional advice when you consider these possibilities.
Credit Counseling
If you cannot see a way out of this debt crisis, or can’t keep track of your bills, contact a reputable credit counseling agency. Ask someone you know and trust to recommend an ethical, reliable one. For help finding one, visit the website of the Association of Independent Consumer Credit Counseling Agencies or the National Foundation for Credit Counseling.
Be sure to find out upfront what they charge and if there is a cost for the initial meeting. Get their fees in writing. Many credit counseling organizations are nonprofit and will work hard to help you solve your financial problems. But be careful. Just because an organization says it's “nonprofit,” that doesn't mean its services are free. Some credit counseling organizations charge high fees, have hidden costs, or may lead you into further debt through bad practices.
A reputable agency can advise you on developing a budget and managing your money with free educational materials and personal counseling. Their counselors are certified and trained in the areas of consumer credit, budgeting, and debt management. They will discuss your entire financial situation with you, and help you develop a personalized plan to solve your issues with debt. Credit counseling can set you on a new path to better finances, but it is not going to eliminate your debt problem overnight. You will still have to get control of your spending.
Debt Consolidation
Debt consolidation means that you borrow more money, and use it to pay off your existing loans. The new loan will have lower monthly payments, which are easier to meet. But the new loan will take a lot longer to pay off, and it will wind up costing you a lot more than your present loans. You use a consolidation loan to pay off personal loans, home-equity loans, car payments, credit card balances and, if necessary, mortgage debt.
Remember not to believe everything that’s advertised. Many ads are come-ons to bring in new business. You may be digging a deeper hole for yourself. The companies may not make the payments as they've promised. They may negotiate to lower the balance owed, but you won't get the benefit. Meantime, their activities could lead to negative entries on your credit report. Be aware that these loans may require you to offer your home as collateral. So, if you can't make the payments on time, you will lose your home. Also, the costs of consolidation loans usually include interest or “points.” One point is equal to one percent of the amount you borrow. You should know that some Debt Consolidators require that you give up your right to include these debts in bankruptcy. Your local bank is a reliable place to go for a debt consolidation loan.
If you have not been making the required monthly payments on your debt, debt consolidation will not put any more money in your pocket. You still must take drastic steps to live within your means. In order for debt consolidation to improve your financial situation, you need to break the debt cycle. Simply put, that means that you need to stop spending money that you haven't earned yet.
Debt Management Plans
A Debt Management Plan is different from a Debt Consolidation Loan. The DMP is drawn up by a credit counseling organization. The DMP requires that you send them money every month and they will use it to pay your bills for you. They may also negotiate lower interest rates for you. Your monthly payment will also have to include their fee, which can be substantial. Again, there are no guarantees. No one will look after your money like you can. You are your own best and safest money manager.
Be sure to verify that your credit agency is informing you of the exact details of any agreements with your creditors. A successful DMP requires you to make regular payments that could last many, many years. Ask the credit counselor to estimate how long it will take for you to complete the plan. You run the risk that they might not do what they promise. And you will be worse off than ever. You may have to agree not to use or apply for any additional loans or credit while you're enrolled in the plan. You have no guarantees that your interests are protected. Some agencies might not make the required credit card payments for you, so that they can negotiate down the amount owed and benefit themselves from this.
A DMP is not for most people. Your first step is to have a certified credit counselor thoroughly review your situation and offer you personalized advice on managing your dept. Even if a DMP is appropriate for you, a reputable credit counseling organization can still help you in developing money management skills and creating a budget.
Debt Negotiation Programs
Debt negotiation differs greatly from credit counseling and debt management plans. In debt negotiation, the agency will bargain down the amount you owe on your credit cards, possibly by threatening the bank with your default or bankruptcy. It can be very risky, and have a long-term negative impact on your credit report and your ability to get credit in the future. Make sure that agency fees are less than the amount of debt relief they are able to negotiate. Ask an independent authority to review the agreements before you commit to anything.
Bankruptcy
When all else fails, personal bankruptcy is generally considered the debt management option of last resort. It may get rid of unsecured debts and stop foreclosures, repossessions, garnishments, utility shut-offs, and debt collection activities. Bankruptcy also allows people to keep certain assets.
Be aware that the results are long lasting and far-reaching. A bankruptcy stays on your credit report for 10 years. After bankruptcy, it will be difficult to obtain credit, buy a home, get life insurance, or sometimes get a job. Bankruptcy usually does not erase child support, alimony, fines, taxes, and some student loan obligations. Still, it is a legal procedure that offers a fresh start for people who absolutely cannot pay off their debts.
Get Out of Debt
However you choose to handle your credit card debt, you must live frugally to solve your debt problems. You must change yourself, first. Financial advice is expensive. Borrowing more money is also expensive. You are the best person to take control and manage your money.
My wish is that your life brings you much success. I hope you have a very happy day.
-----Surfer Sam
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