Payoff $50,000 In Credit Card Debt

Running up $50,000 in credit card debt is not impossible. Millions of Americans do it every year.

In fact, 1.6 million American consumers had credit card debt of more than $50,000 in 2016, according to Experian, one of the three major credit bureaus in the U.S.

Paying that bill off is not impossible either, though it is considerably less fun.

Accumulating that much credit card debt almost always starts innocently and ends badly. You can dig a decently deep hole of debt by eating out at restaurants three or four nights a week, picking up bar tabs a few times, maybe buying new furniture or appliances, taking on an expensive hobby like golf or skydiving or just going on vacation.

All you’ve got to do is show them the credit card.

Unfortunately, the spending creeps up on you and, before you know it, you’re one golf vacation, two kitchen appliances and three nights out on the town in over your head and the bottom line says you owe more than $50,000.

The Bureau of Labor Statistics said consumer spending went up in every household component in 2015, including categories primarily serviced with credit cards, like household furniture and appliances (up 15%); eating out (up 7.9%); entertainment (up 4.2%); and clothing (up 3.4%).

But the real key to growing debt to unmanageable status is to take on multiple credit cards and make only minimum payments on each one. That’s the starting point for stress.

More than 167 million American adults have at least one credit card and the average consumer with a credit card carries four of them. Research by Experian says that the average credit limit for cardholders at the start of 2017 was $8,071.

You don’t have to be too far above average with the number of credit cards you carry and the max amount you charge on them to get to $50,000.

So, the question remains: How do I get out?

3 Choices to Beat $50,000 of Credit Card Debt

The average U.S. household carrying credit card debt owed $16,748 in 2017 and paid more than $1,300 a year in credit card interest.

Those are frightening numbers to the average Joe, but not to the million-plus consumers with $50,000 or more in credit card debt. They wish they were average! Or, at least wish someone would help them shrink their debt to the average level.

There are plenty of angles to attack the matter, but most of the choices fall into three categories:

The first two require a great deal of thought, discipline and effort. They also require time. Depending on your resources, it takes 3-5 years to put that much credit card debt to bed.

The final option – bankruptcy – is a last-ditch effort that should be considered only when attempts at the first two have not produced the desired result.

Before You GET Started …

No matter which choice you make to resolve your credit card debt, there are some steps you can take to ensure a more positive outcome.

It goes without saying that putting the credit card away, except for dire emergencies, and start paying for all purchases with cash. This is the first step toward regaining control of your finances. By paying with cash, instead of a credit card, you begin to understand just how much money you’re spending every time you reach into your pocket.

It hurts, and it should. It’s a lesson learned and should make you much more disciplined about when and where you spend money.

Beyond that, here are five steps that will help you conquer $50,000 of credit card debt.

  1. GET YOUR FACTS STRAIGHT – Do you really know how much money you spend every month and what you get for all that money? A 2013 Gallup poll showed that only one in three American households use a detailed written budget. There are plenty of phone apps that will help you track spending as you do it. Take advantage of one and discover why a budget is a great bailout.
  2. FIND A SECOND INCOME – A second job provides extra income that allows you to hammer away your debt every month. Finding a roommate to share basic expenses (rent, utilities, groceries, transportation) turns that into a sledgehammer.
  3. DOWN, DOWN, DOWNSIZE: It’s almost a certainty that you can create more income by living in a smaller place, driving a less expensive car, stop buying any clothing or accessories and limit eating out to no more than once a week. Some less dramatic but equally effective ways to reduce expenses include cheaper cell phone service; no cable TV; and no birthday, anniversary or Christmas gifts. Less will mean more.
  4. CAN WE NEGOTIATE? – Card companies want to get paid … something! If you have been making payments every month – even just the minimum – play the loyalty card and ask them to accept less than what you owe to eliminate the debt.
  5. AUTOMATE PAYMENTS – Paying your bills this way helps you on two fronts. First, you’re on notice every month to have money in your account to pay bills or you get slapped with penalties for insufficient funds. Second, you remove the all-too-familiar excuse that “I forgot to mail the check.” This is a very healthy step toward taking responsibility for your finances.

Even if you only adopt bits and pieces of the five suggestions, you will have enough ammo to shoot down your debt problems.

The next question then is: What method should you choose?

Debt Management Program

Debt management plans might be the simplest answer to huge credit card debt because nonprofit credit counseling agencies like InCharge Debt Solutions help with the most difficult parts: reducing interest payments on debt and setting up a budget you can live with.

InCharge Credit counselors work with credit card companies to find an interest rate and monthly payment you can afford. The average InCharge client has their interest rate reduced to somewhere around 8%, though some go even lower.

To see how dramatic a difference that makes, look at the difference in monthly payments and interest charged on a $50,000 credit card debt paying the national average of 15.9% and one paying a rate of 8% secured through an InCharge credit counselor over a five-year period.

Balance: $50,000 $50,000
Interest rate: 15.9% 8.0%
Monthly payment: $1,213 1,014
Payout period: 5 years 5 years
Total interest paid: $23,993 $10,840
Total amount paid: $73,993 $60,840

You would save $200 a month on payments and $13,153 over the course of a five-year payout plan.

The second thing InCharge credit counselors offer is just as valuable: Setting up a budget and offering tips on how to manage your money. The counselors review all your income and spending and then make suggestions on how to set up a monthly budget so you have enough money for the basics (food, shelter, transportation), but create enough space to start paying down the credit card debt.

Do It Yourself Plan

This might be the most difficult option, if only because you must make every choice yourself, starting with the method you plan to use to attack your debt.

Debt avalanche? Debt snowball? Zero-interest balance transfer? Set up your own monthly payment schedule? Mix-and-match?

Who knows!

For the sake of this argument, we will assume you have six or seven credit cards that are maxed out or nearly maxed out at their spending limit of $10,000 and the total debt owed is $50,000. If the minimum payment due for each card was 2%, you would be paying $150-$200 per card, or a total of somewhere around $1,200 month. That’s just for the minimum amount due!

Here is a look at the pros and cons of some do-it-yourself repayment plans:

  • Debt avalanche. The goal is to pay down debts with the highest-interest rates first because they cost you the most. You make minimum payments on each card, then devote whatever money is left in your monthly budget to paying off the card with the highest interest rate. When that card is paid off, move to the card with the next highest interest rate and keep going until you’ve paid off every card. Pros: You will save a lot of money paying off high interest rate cards first. Disciplined, on-time payments will be rewarded. Cons: The monthly payment on some high-interest cards can cripple your budget. It would be easy to get discouraged because it’s a slow process.
  • Debt snowball. The goal is to pay off the smallest debts first and that success will keep you motivated as you move to the larger ones. Make minimum payments on the largest debts, then throw whatever money is left at the smallest debt until it is paid off and move on to the next smallest debt. Pros: It’s easier to stay focused when you have victories, even small ones. Cons: The interest on cards with larger debt grows uncontrollably when all you do is make minimum payments. If something happens and you don’t pay off the small debts quickly, you could be in big trouble.
  • Zero-percent balance transfer. The goal is to transfer the balance from a high-interest rate card to a zero-percent interest card and make big payments every month to reduce the balance. If you can pay off the debt before the zero-percent interest offer expires, you’re way ahead. Pros: Paying zero-percent interest vs. 15%-25% is a no brainer. Cons: Some cards might allow you to qualify with credit scores of 650 or higher, but the best deals require a credit score above 720. Also, there is a 3% transfer fee on most cards and 15-24 month time limit before regular interest rates apply.
  • Set up your own payment plan. Start by creating a line in your monthly budget that is devoted to credit card payments. Apply for a zero-percent balance transfer card or two, if you can get them. Choose a starting point – either high interest cards or low-balance – and attack it. This could be tricky, but if you have a good plan and a lot of discipline, it might work.

Bankruptcy Is a Worst Case Scenario

Bankruptcy is treated like a disease, but it’s a financial cure for a lot of people.

Every financial analyst or debt lawyer would agree to aggressively pursue every other possible solution, but if you can’t eliminate $50,000 in credit card debt in five years, either through a debt management program or your own do-it-yourself plan, bankruptcy is a legitimate answer.

There will be severe consequences from bankruptcy – most pointedly the 7-10 year blot on your credit report and credit score – but bankruptcy gives you a chance to start all over again and there is nothing wrong with second chances.

Because credit cards are considered unsecured debt, the obvious choice for bankruptcy is Chapter 7. In Chapter 7 bankruptcy, you keep what is known as “exempt” property such as a house, car, equipment you use at work and any retirement savings and liquidate “non-exempt” property such as second home, second car, bank accounts, stock investments, card collections.

The money gained from selling assets is applied to your debt and whatever is left over is forgiven.

If this is your only option, it’s best to hire a bankruptcy lawyer to take you through the necessary steps to successfully file. In 2016, 95.5% of people filing Chapter 7 bankruptcy had their debts discharged.


Sources:

Karen Carlson
kcarlson@incharge.org

Karen Carlson is a personal finance expert and writer. Her financial advice has been published in Time, US News & World Report and Fox Business News. Carlson is an Emmy Award-winning producer of educational television and recent nominee for NFCC Financial Educator of the Year.