Credit cards offer great convenience and have become an integral part of everyday life. When buying something, it makes more sense to use a credit card than to spend cash.
You get the advantage of a credit period that allows you to delay paying for what you have bought by up to several weeks. You also have the opportunity to earn points for every dollar that you spend. These can be exchanged for rewards or other benefits.
When you get your credit card statement every month, you have the option of paying only part of the amount due and carrying the remaining outstanding amount forward at a certain rate of interest.
This facility is utilized by large numbers of people. In fact, it is expected that in 2016, the level of credit card debt will rise to $1.02 trillion, the all-time record set back in 2008 at the time of the great financial recession.
Unfortunately, many consumers are unable to manage their debt and take on amounts that they are unable to pay back. If you find yourself in a situation where your credit card debt has spiraled out of control, some of these steps may help you.
Acknowledge that you have a problem
This could be very difficult to do. When you shop with your credit card and carry forward most of the amount to be paid later, the total amount in your account accumulates at a rapid pace.
In the first few months, the amount outstanding looks reasonable and you get the impression that you will be able to pay it back comfortably. But as time goes by, and interest accumulates, you realize that the total amount of debt is out of control.
In addition to the interest that is added every month to your balance, the new purchases that you make do not have a credit period. That means every time you swipe your card, interest starts accumulating from that day itself.
It is critical that you admit that your financial situation is unmanageable. Once you do this, it will be easier to find a solution.
Stop using your credit cards
If you continue using your credit cards, the financial hole that you have dug yourself into will keep getting deeper. Instead, switch to cash or a debit card.
Many people carry a belief that if they are already thousands of dollars in debt, an additional hundred or two will not really make a difference. They do not realize that every little amount they spend compounds the problem and makes it more difficult to solve.
Make a list of your credit card debts
Now that you have stopped using your cards, you have taken the first step to getting out of debt.
But it is quite likely that the total amount you owe the card company will go on increasing as interest will be added every month. Depending upon the amount that you pay for each card, your overall balance will continue to rise.
The minimum sum that you are required to pay against your cards may be as low as 2% of the outstanding balance. If the amount you give your credit card issuer is kept at the least that you are permitted to pay, it is quite likely that despite not using your card at all, the amount due will keep rising.
When you list out your cards, don’t forget to include details about the total amount that you owe and the rate of interest that each card issuer is charging you.
This list will show you where to focus your efforts so that you can pay off your debt as painlessly as possible.
Ask for an interest rate reduction
Speak to each of the credit card companies and ask them to lower the rate of interest that they charge you. It is unlikely that they will agree to your request immediately. But it pays to be persistent.
Explain your financial situation and tell them how an interest rate reduction will enable you to continue to make payments. The person who answers your call may not have the authority to commit on lower charges. If you are turned down, ask to speak to the supervisor.
It is useful to remember that you need to convince the bank that lowering the interest rate will help them too, as it will allow you to pay your dues. Explain to the bank that without a reduction, it may not be possible for you to pay at all.
Don’t lose your temper at the person at the other end of the line. Speak in a calm manner and have all the facts about your credit card account handy. Be ready to explain how long you have been a customer and your desire to continue the relationship.
Even if you can get the rate reduced by a few percentage points, the benefit can be several hundred dollars a year. Multiply that by the number of cards you hold and you’re talking about substantial savings.
Make regular payments
It is essential to pay the minimum amount into each of your card accounts every month. This should not be a problem as it is possible to pay as little as between 2-4% of the outstanding balance and carry the rest forward.
Don’t make the mistake of putting all your available surplus cash into the card account that carries the highest balance. This will only add to your problems because you will be required to pay late fees of between $25 and $35 in each of the other cards.
The correct strategy to follow is to put the money that you have left over after paying the minimum amount into each account, into the credit card that carries the highest rate of interest.
Make a plan to lower your expenses
If you are to accumulate enough money to get out of credit card debt you will need to control the amount that you spend. After all, your outstanding balances have accumulated because you consistently spent more money than your income could afford.
The first step is to promise yourself that you will not incur any big-ticket expenditure on an impulse. Wait for a week or more before you decide to splurge on that new laptop or smartphone. You may realize that you don’t need it immediately after all.
Sit down and work out the amount of money that you need to spend on items like groceries, gas for your car, your electricity bill, and other essentials. Once you have arrived at this amount, set an allowance for yourself for spending on activities that you enjoy. But you will have to follow the budget that you have set for yourself very strictly.
The remaining cash can be used to pay off your debt.
Explore the option of switching over to cheaper loans
Many credit card issuers have balance transfer offers that can save you significant amounts. See if you are eligible. You could get a 0% percent interest rate for a certain period of time after which the rate would go up.
There could also be a balance transfer fee involved. Do the calculation to determine if overall you are gaining. You could also explore switching over to a card that has a lower interest rate.
Another option is to check the interest rates on personal loans. If you can get one which charges less interest than that charged by your credit cards, it makes sense to shift your debt.
In certain circumstances, a home equity line of credit (HELOC) could be the ideal solution. But use this route to get out of debt very carefully. The lender will advance you money against the security of your home. If you do not pay back, your home could be at stake.
Your account could be referred to a debt collector
If you are not able to pay your dues to the credit card company, your account may be referred to a debt collector.
In the event that this happens and you are approached by a collector, you have certain rights that you should be aware of.
The debt collector has to tell you the name of your creditor (the credit card issuer who you owe money to), the amount that is outstanding, and the method by which you can dispute the debt or seek verification of the amount being demanded from you.
You should write to the debt collector asking for details of the amount that you owe and also ask for a copy of the documentation that proves that you are liable to pay. It is useful to remember that your credit card debt cannot be claimed after a certain number of years.
Each state has a different statute of limitation specifying the number of years for which a debt can be claimed. If the credit card company has sold this “Zombie Debt” to a collector, you have the protection of the law and need not pay it.
Remember that when you make a partial payment, the “Zombie Debt” will get reactivated so you need to be very careful about how you respond when you are approached by a debt collector.
Credit card debt settlement
If you have accumulated a large amount of credit card debt that you cannot reasonably hope to pay anytime soon, a settlement with the card issuer may be a way out.
Say you have an outstanding amount of $20,000 and you have stopped making payments many months ago. You could approach the credit card company and tell them that you have accumulated $12,000 which you are willing to pay as a final settlement amount.
After considering your income level and estimating that their chances of making a full recovery are bleak, the card company may decide to accept your offer. While such settlements are definitely possible, they also hold several risks.
If you stop paying and then approach the card company after a year to settle on half of the outstanding amount, they may refuse. You would then be stuck in a situation where your dues have mounted because you held back payments.
Even if a settlement does take place, the credit card company will inform the credit bureau that the debt was settled in full by payment of a lesser amount. This will adversely impact your credit score.
One way to try and avoid your credit score from taking a hit is to ask the card company to report that you have paid “as agreed upon” instead of saying that you have “settled.”
Another aspect of a settlement that you should be ready for is that you would need to pay taxes on the “excused debt.” If you have paid $12,000 to settle an outstanding of $20,000, the difference of $8,000 will be taxed. How does the tax department come to know? The bank is required to inform them.
Don’t put all your hopes into getting a settlement
When you get into credit card debt, there are a number of approaches that you can adopt to extricate yourself. Usually, it is a time-consuming process during which you have to exercise a great deal of financial self-discipline and restraint.
A settlement with the card company is an option that can solve your debt problem at one stroke. But it is not a solution that you can rely upon. If the card issuer refuses to allow a settlement, you find yourself in a bigger financial mess.
It is better to develop a plan that allows you to pay off all your debt over a period of time.