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Credit Card Debt: $12,000 In The Hole - How Do We Climb...

By Mike Schiano

Ask The DebtBuster

Q: My husband and I have $12,000 in credit card debt. We can always make our minimum payments, but the balances never go down. Is there something we can do to start reducing our debt?

DebtBuster: This is a common problem faced by families who can end up paying on debt for year after year and never make any progress in paying down the principal amount. Your creditors would love to keep you spinning your wheels and paying lots of extra interest - while paying off little of the principal. Making just a minimum monthly payment of two percent on a $12,000 debt at 18 percent interest will take you more than 53 years to pay off!

To speed up the process of paying off your debts and saving lots of interest expenses, start by listing all of your credit card accounts from highest interest rate to lowest. Attack the credit card with the highest interest rate first by paying as much above the minimum payment as possible each month while paying just above or at the minimum on the other credit cards. Once the card with the highest interest rate is paid off, use the same strategy on the next card.

You can't add any new debt to your credit cards - or take on any new debt at all - or this strategy loses its effectiveness. It requires focus and discipline. Keep thinking about how great it will feel to climb out of debt and all the good things you could do with the money you are now throwing away on interest payments.

If you have maintained good credit and have not made late payments for the past 12 months, it's a good idea to call your credit card companies and ask them for a decrease in your interest rates. Tell them you are considering offers from some other card companies with low introductory rates if you transfer your balances. Shop around for some of these offers. Moving your balances from high interest rate cards to lower interest rate cards with no application fee and no annual fee is a great way to shorten your payoff time and get out of debt more quickly.

Q: Why are people on a debt management plan often unable to get a secured loan such as a home or car loan? It's almost as though being on a debt management program is just as bad as bankruptcy. Shouldn't it be the opposite?

DebtBuster: Your frustration is understandable, but put yourself in the position of a potential lender. If someone needs help paying their current debts and enrolls in a debt management program with a credit counseling organization, would you as a lender be willing to take a chance on that person by giving them more debt? More likely, you would wait until much of the debt had been paid.

According to Fair Issac, the company that created the FICO credit score, credit counseling doesn't help or hurt your credit score. What really hurts your chance to obtain new loans is the damage done to your credit reports and scores because of all the late and missed payments that led you to seek a credit counselor in the first place.

The lending business is all about judging future risk of default. People in a debt management plan are there because they could not afford to keep up with their debts. They are smart to get help but also should realize that they should not obtain new debt until gaining control of their debt payments.

It's far worse for someone who has filed personal bankruptcy, since this remains on your credit report for 10 years. Also, most loan and credit card applications ask if you have ever filed for bankruptcy, so it really can stay with you for a lifetime.

Credit counseling is designed to help you rehabilitate your damaged credit by providing some breathing room through lower monthly payments and some relief from high interest rates. After making on-time payments to your creditors each month for 12 to 24 months, you again will become creditworthy in the eyes of lenders again as your credit score begins to improve.