Credit Card Debt Relief Options
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Scarlett McCarthy got into the habit of supplementing her expenses with credit cards as a college student.
“It was a back-up plan whenever I ran out of money,” says McCarthy, 26, now writer and founder of Literally Broke, a blog about money for artists and creatives. She would let the balances go up, then pay them off when she worked longer hours or had a rush of money. But after graduation, McCarthy says she began to rely even more on credit to maintain her New York lifestyle.
“I was doing everything you weren’t supposed to do: buy coffee, eat out at every meal,” she says. “I kept putting my daily expenses on my card, and at its highest it hit $ 10,000.”
Credit card debt can be a slippery slope, says Katie Bossler, financial expert and quality assurance specialist at nonprofit Greenpath Financial Wellness. “And there’s a wall that you’ll end up hitting because those monthly payments are so high, or there’s nothing left to borrow on those credit cards because you’ve maximized them all.”
After years of racking up sales during periods of underemployment and taking on debt to maintain a lifestyle beyond her means, McCarthy “hit the wall” at a friend’s birthday dinner.
“I was going to offer to pay and I was going to have to put it on my credit card,” she says. “And I had this looming feeling where I knew I couldn’t continue to float my lifestyle on my credit card. I knew I had to get serious about this.
Assess your debts
Before you can embark on a debt relief strategy, you need to know your starting point.
McCarthy says the first step she took was to make a list of all of her debts. Not only was that a basis for moving forward, but knowing that total and dealing with it added to her motivation, she says.
If you’re ready to deal with your credit card debt, take the time to look at your finances as a whole. Know the details of your situation and make sure you are in the right place to start a repayment plan.
Ask yourself the following questions. The answers can help you determine how to approach your debt in an effective and sustainable manner.
- Do you have an emergency fund? Even if it is not fully funded, make sure you have a certain amount of money in the bank to guarantee security while you pay off your debts.
- Do you have extra cash each month to spend on an aggressive payment plan? If not, figure out how much you are able to spend on your credit card balances and think about how best to allocate them.
- Can you stop using your card altogether and switch to cash payments until you have a better understanding of your debts?
- What does your budget look like? Are there any recurring expenses that you can reduce to free up more cash for your debt?
After taking stock of your situation, here are some options to consider implementing along the way:
Talk to your creditors
“Talk to your creditors first,” says Billy Hatton, CFP, founder of Billfold Budget Counseling in Los Angeles. “A lot of times you can get a rate cut, but you have to go get it. This reduced interest can have a huge effect.
If you’re still able to make payments, see what your credit card company has to offer. Since the onset of the coronavirus pandemic, working directly with your transmitter has become an even more viable option. Many have set up abstention and assistance programs for people facing financial difficulties.
Ask for an interest discount for a period of time, Hatton recommends, or an interest-free offer. Not only will your payments go directly to your principal balance, the interest relief can also save you time when looking for other options available to you.
If you’ve accumulated balances on multiple cards, have personal loan debt, or even collection debt, consolidation is one of the most effective ways to both lower your interest rate and help you pay off your debt. sales faster.
Make additional payments for your balance whenever you can. Even $ 5 or $ 10 on top of your regular payments can add up and help you get rid of your debt faster.
There are different ways to consolidate, each with their own refinancing possibilities and their own qualification requirements. Consolidation options to consider include opening a credit card with balance transfer, obtaining a HELOC or personal loan, or working with a nonprofit credit counselor on a consolidation plan.
However, these options often require a good credit rating, and large debts can negatively impact your rating over time. Make sure you research the consolidation methods that are most accessible to you and that meet your needs before applying for a new loan or line of credit.
Develop a strategy
Look for profitable strategies that can motivate you to maintain momentum as you go.
This can be especially important for someone who may not be eligible for consolidation or refinancing options, or who receives unfavorable terms, as was the case with McCarthy. She considered a balance transfer, but was put off by the $ 300 fee, as well as how her own habits might hamper her progress.
“I had this debt for so long already, and if I didn’t just tackle it, I was scared to let it stay on this balance transfer card and not be proactive about it,” she said. .
Instead, McCarthy says she overcame her debt by budgeting, doing overtime and multiple side activities to generate extra income, and only using the money to become more aware of what she was doing. was spending.
Identify a strategy that will best prepare you for success, whether you are motivated by the discipline of a strict budget and extra payments, the mental boost of snowballing your debt, or the mathematical advancements of the debt method. avalanche.
If you’re not sure which direction is best for you, talking to a nonprofit debt counselor or financial planner can help.
More things to consider
Other financial goals
While you won’t make as much progress on other financial goals during your debt repayment period, you shouldn’t lose sight of them either. Instead, prioritize your debt while adopting the habits that will help you take the next steps to building savings or contributing to retirement.
The sooner you can pay off high-interest debt, the faster you’ll free up more money to spend on your other goals. And meeting your debt repayment goal can make it easier to implement the behaviors you’ve learned along the way into other aspects of your financial plan.
Debt Relief Scams
There are many predatory businesses out there waiting to take advantage of you and your debts. “If it sounds too good to be true, it probably is,” Hatton says.
Start by looking for a counselor approved by the National Foundation for Credit Counseling who can not only help you with debt relief, but teach you the skills to stay debt free.
“The main thing I’m looking for is that they are non-profit, that they focus on education, and that they don’t just try to focus on eliminating debt immediately, because it’s a process, ”says Hatton.
Bankruptcy: a last resort
Bankruptcy can give you relief from your credit card debt, but it won’t solve your financial problems. This is an extreme measure that is best to consider only after exhausting your other options or if you are facing lasting financial difficulties.
“If someone finds themselves in a situation that is unlikely to ever change – a permanent loss of income due to the death of a spouse or a transition due to a disability – it may be worth exploring,” Bossler said.
But if your situation is temporary or if you can reduce costs significantly (large expenses like housing and transportation), start making these changes before considering bankruptcy.
“I’m usually not a big fan of saying you have to live sparingly, but the consequences of bankruptcy require you to live in frugality anyway,” Hatton says. “You may not be able to have the same quality of life you once had, so you might as well start before the court forces you to do so.”