Credit card debt management can be tricky. If your credit card debt is out of control, you may be wondering how to get out of this mess with the least amount of pain and hassle. Unfortunately there isn’t a method that is 100% pain-free. Below are five options for managing your credit card debt that you have available to you:
Debt Acceleration/Snowball Method
This method entails paying extra money over and above the minimum payments on your credit cards. This credit card debt management method is popular to build up momentum quickly to pay off your credit card debt.
There are two ways to go about it: you can either apply the extra payment amount to the card with the lowest balance or the card with the highest interest rate. Which is better generally depends on your personality.
Starting with the lowest balance credit card will allow you to see progress and gratification more quickly, as that card will be paid off the fastest. If you’re more logically motivated, then paying off the highest interest rate card may be better because it will save you the most in interest over the long term. Most people do better with seeing the cards getting paid off more quickly though.
Debt Consolidation
This involves borrowing from the bank to pay off your debts. The use of home equity loans is quite common. This form of credit card debt management results in one lower monthly payment at a lower interest rate.
However, you should be aware that you need to have collateral to borrow and you are trading an unsecured debt for a secured debt. If you are behind on your credit card payments and/or have no collateral to secure the loan, odds are you won’t be able to get one.
There is not a good strategy if you do not address the issues resulting in the credit card debt to begin with. Otherwise, you run a very real risk of racking your credit cards back up again.
Credit Counselling
This is a debt repayment program where you go to a credit counsellor who looks at your budget and what you can afford and then negotiates lower interest rates and payment schedules with your creditors on your behalf. This usually results in a lower monthly payment, which you make to the counselling agency who then distributes it to your creditors.
Not only do you give up control in this process, this credit card debt management strategy is also very inflexible – you cannot miss any payments. So if you are still struggling to make ends meet even with the lower monthly payment, it may not work for you. In fact, approximately 75% of people never finish the plan for this very reason.
Bankruptcy
Bankruptcy is an option often pursued by those who are unable to make their debt payments. It forces your creditors to cease their collection actions, reverses judgements and stops wage garnishees. Any property that is not exempt is liquidated and your debt is generally wiped out.
However, as of October 2005, there are new rules in the U.S. that make it tougher to qualify for this type of bankruptcy. This means that the court will apply a “means test” and if you can afford to pay $100 per month, you will still have to make payments (determined by the court) to your creditors for the next 3 to 5 years.
Bankruptcy can be a lifesaver for those who really need it, but this credit card debt management option should be considered as a last resort. Not only will it affect your credit rating for 7 to 10 years or longer, it will result in much higher interest rates and complete loss of control in the process.
Debt Settlement
Debt settlement is a flexible credit card debt management strategy that involves negotiating with your creditors over the amount of money that you owe. If you are experiencing a legitimate financial hardship, such as a loss of income, medical issues, divorce or separation, have $15,000 or more primarily in credit card debt, can still manage to make payments on your debt and/or have some financial resources available, and are committed to avoiding bankruptcy, then this may be a viable option for you.
Ultimately this credit card debt management strategy involves saving the monthly payments (instead of paying them to the credit card companies) in order to build up a lump sum of cash to negotiate with. The goal is to settle the credit card debt for 50% or less of the balance owing.
Because you stop making payments, this strategy will affect your credit rating negatively. However, your credit score will start to improve once the debts are settled and it is better than having unresolved debt or a bankruptcy on your credit report. Because you are settling with the creditor for 50% or less of the balance, they will discontinue your credit privileges and you will no longer be able to use that credit card. However, this only affects the credit cards which you are negotiating settlements for.
There are two ways to go about debt settlement: hire a debt settlement company to negotiate with your creditors for you, or do-it-yourself.
There are two big disadvantages to using a debt settlement company. The first is the hefty fee that they charge, which is usually 15% of your debt. If you have $50,000 in debt, the fee would be $7,500. The second disadvantage is that many of the major credit card companies react negatively to this third-party involvement and will take legal action or use hardball tactics instead. Because many will settle directly with the customer and you will save yourself thousands of dollars, doing it yourself is our preferred choice.
However, we do not recommend that you try this on your own without the right information and training. In this process, timing is very important and correct documentation is critical. We have found a do-it-yourself debt settlement training system that will teach you everything you need to know, help you negotiate the best deals, provide moral support and avoid the pitfalls.
