How To Get Out Of Credit Card Debt
Forget bosses, teenagers and the IRS. The biggest cause of headaches in America is the credit card.
There are no government studies to directly prove that. But there are numbers like $15,762 and $2,630. The first one is how much credit card debt the average U.S. household carries. The second is how much that household pays in credit card interest every year.
That’s a far bigger headache than having to take your 13-year-old daughter to a Justin Bieber concert, much less paying $1,400 (seriously) for tickets near the stage.
So what’s the cure? We’ll get to that, though the truth might hurt.
In the meantime, there are a variety of headache treatments out there. All it takes to find them is a little research, though even that can be a headache so we’ve done it for you.
Here are the major ways to ease credit card pain. We’ll take them from the most benign to the most drastic.
You track your expenses, set financial goals and tailor your lifestyle to meet them. Use a credit card payoff calculator to figure out how quickly you can pay off your debt.
- It’s free. There’s no need to hire a third party to set up a budget or negotiate with credit card companies for better terms.
- You are the master of your own financial destiny.
- It can be time consuming.
- You might make budgeting mistakes or need the services of professional counselors and negotiators.
Time to repay: That’s up to you.
You move your debt to a new credit card offering a lower interest rate, sometimes as low as 0% for up to 18 months.
- No interest should mean a lower monthly bill.
- You can consolidate your various credit card bills into one payment.
- You’re exposing yourself to being even deeper in debt. You must read and adhere to the fine print. That low introductory rate always has an expiration date. If you don’t pay off your debt in time, you might end up paying a higher interest rate than you had with the card you abandoned.
Time to repay: It depends on your terms. Say you have $5,000 of debt and make monthly $400 payments. With a 20% APR it would take 15 months and you’d pay a total of $6,000. A 15% APR would take 14 months and you’d pay a total of $5,600. A zero-percent interest means 13 months, or a month longer than most 0% balance transfer cards allow.
Credit card debt consolidation companies can help you by paying off all of your credit card debt and leaving you with a single loan to pay off. The key is getting beneficial credit consolidation loan terms (i.e. low-interest rate) that save you money.
- Simplicity. Instead of dealing with bills from each credit card, you have one monthly payment.
- Your financial burden is eased.
- If you use your house or other assets to secure the loan, you could lose them if you default on payments.
- If the interest rate isn’t low enough and/or the pay-off time is excessive, you might end up with more debt than when you started.
Time to repay: It varies, but most debt-consolidation loans are for 36-to-60 months.
It’s essentially a second mortgage. You use your house as collateral to get a loan that is paid over a fixed term. Or with Home Equity Line of Credit (HELOC), a lender opens an account you can draw from as the needs arise.
- Interest rates are generally far lower than those offered by credit cards.
- You can consolidate all your debts and have one monthly payment.
- A HELOC offers the flexibility of borrowing smaller amounts depending on your circumstances.
- Your house is used to secure the debt, so it could be foreclosed if you fail to make payments.
- Closing costs, such as attorney fees, appraisal fees, title search and points.
- If you get an adjustable interest rate and the market doesn’t cooperate, you could end up with a credit-card type interest rate.
- You’ll need a favorable debt-to-income ratio to qualify.
Time to repay: HELOC draw periods are usually 5-10 years and repayment periods are 10-20 years. Home equity loans can be taken out for up to 30 years.
You hire a non-profit credit counseling agency to negotiate better terms with the credit card agencies. A counselor reviews your financial situation and tailors a budget. You make one monthly payment to the company, which distributes those funds to the creditors.
- Lower interest rates and simplified financial obligations.
- You get a clear picture of those obligations, and counseling typically includes a course on budgeting that could enlighten you.
- If you miss a payment, creditors will remove you from the DMP list and might restore previous terms.
Time to repay: Most DMPs are for 36-to-60 months.
The most radical remedy, recommended only if your credit card headache is migraine caliber and all but incurable.
You stop paying your credit card bills and a company tries to negotiate a reduced settlement with creditors on your behalf. You pay the company that amount, either in a lump sum or monthly payments. It distributes that money to your creditors.
- Your debt can be drastically reduced, sometimes more than 50%.
- You make one payment a month instead of many.
- It destroys your credit score when you stop paying your bills. Accounts usually need to be three to four months delinquent before creditors will negotiate a reduced payment. In the meantime, late fees and credit score damage piles up. Debt settlement stays on your credit score for seven years.
- There is no guarantee creditors will agree to a reduced payment. If they refuse you will be in worse financial shape than you started.
- You must pay taxes on the debt that is forgiven.
- The industry has a shady reputation since companies make money by taking a hefty percentage of the debt that’s negotiated.
Time to repay: Typically two to four years.
This is the often the easiest and most effective treatment. A professional studies your financial situation and advises you how to escape credit card debt.
- They do the work for you.
- There is usually no fee to discuss your situation with a counselor.
- None, as long as you use a reputable credit counseling agency. Check out the National Foundation for Credit Counseling for recommendation at https://www.nfcc.org/about-us/.
Time to repay: It depends on which program (DMP, HELOC, etc.) you choose, assuming the counselor advises one of those treatments.
Key word: Treatment.
All these programs are really just ways to deal with symptoms. Because the true cause of credit card headaches isn’t credit cards. It’s the person using them. In fact, average credit card debt varies by state, level of education and income, among other factors.
If you take one of the aspirins we’ve discussed, your condition will only return if you keep spending beyond your means. So pick a treatment that best suits you.
Just remember, only you can cure yourself from credit card pain. If you do, imagine how much easier it will be to deal with life’s other headaches.
Wonder if there’s a cure for Justin Bieber?
Average Debt Statistics And Relief In America
Top 10 Ways To Spend Your Tax Return
Are you one of the 54% of tax-filing Americans expecting a refund from the IRS this year? According to the US government, the average refund is around $2700. Here’s the InCharge Top 10 on How to Spend Your Tax Refund.
#1. Skip the Refund Anticipation Loan
We have a deal for you. We’ll loan you some money and the interest rate is only 250%. What do you say? If you answered no, then skip the refund anticipation loan offered by tax preparation firms. With online filing, you can get your refund in as fast as 1 week. Wait and skip the fees.
#2. Skip the Refund Anticipation Check
The Refund Anticipation Check is a short term bank account set up by your tax preparer. It’s designed for people who don’t have bank accounts. The account is controlled by the tax preparer and fees are taken out once your refund arrives. If you do not have a bank account, consider setting up a no-fee account with a local credit union. Come to your tax preparer with your account number details. Don’t pay someone else to set up an account for you when you can do it yourself for free.
#3. Beef Up Your Emergency Fund
Now that we have figured out how to get 100% of your tax refund, let’s look at what you can do with it to improve your financial situation. A recent poll by the National Bureau of Economic Research revealed that 50% of Americans have no money set aside for emergencies (car breakdown, unexpected medical bills, etc). If you are in the ‘no emergency fund’ 50%, don’t despair. Use your tax refund to build a $2000 emergency fund.
#4. Pay Down (or off) your Credit Cards
Join the 63%. That’s right. Join the majority of Americans who have no credit card debt. Let’s be pretty clear here: If you feel ok living without much financial stability, then by all means stay in the 37%: pay your monthly interest fees and finance charges. Consider this: imagine going shopping where the storefront windows read “Pay 30% more” or “Pay 70% more.” Every time you buy something on a credit card and carry the balance, you are paying more. After building up your emergency fund, use your tax refund to pay off credit card debt.
#5. Start a Pre-paid college fund for your kids (or pay down your own student loans)
Suppose you have an emergency fund in place and your credit cards are totally paid off. We recommend starting an education IRA for your children. Why? The money you invest will grow tax free until your children go to college. Research shows that kids with college funds are more likely to go to college, because someone has invested in their future; someone has shown them (through action) that their future is worth it. Kids with college funds are not just more likely to go to college, they are more likely to succeed in college. (Lack of financial resources is the number one cause of drop out). Education is the single biggest predictor of long term employment stability and income. College grads make double what high school grads make. Don’t have children? Pay down (or off) your own student loans with your tax refund.
#6. Pay Down (or off) Your Auto Loan
Here’s another idea. We recommend using your tax refund to pre-pay on your car loan or pay it off if you can. Owning your car outright will can free up $200-$300/month. Paying off your car early means having extra money not once a year when you get your tax refund but every single month. You could use this extra money to accomplish #7, #8, #9, and #10.
#7. The Big Emergency Fund
Once you’ve gotten used to having a small emergency fund (a few thousand dollars), it’s time to start saving up for the “Big Emergency Fund.” The Big Emergency Fund is designed to get you and your family through the big things. Did you know that the average length of unemployment is 9 months? Could you maintain your expenses for 9 months without employment? Consider adding your tax refund to your emergency fund. This money will help you sustain a major loss of income or unexpected financial burden.
#8. Save for a Downpayment
Join the 66% of Americans who call themselves homeowners. With today’s low interest rates and low purchase prices, you could get a great home at an affordable price.
#9. Retirement: Save for it.
What does your retirement look like? Will you be reading a book (if those still exist) on a front porch or working the early shift at Walmart? Unfortunately, many Americans see no end when it comes to work. You can have the retirement you want, especially if you start young. Open an IRA with your tax refund.
#10. Enjoy yourself.
Congratulations and welcome to the good life. You have no debt, a retirement strategy, and education funds for the kids. Go on a vacation. Buy yourself a big screen TV. Before you go and book your cruise, we have one piece of advice for you: give yourself a raise by adjusting your withholding. That way you’ll have more of your money in your pocket all year long.
(El Issa, E.)(ND). 2015 American Household Credit Card Debt Study. Retrieved from https://www.nerdwallet.com/blog/credit-card-data/average-credit-card-debt-household/
(Williams, F.)(ND). Measuring Average Credit Card Debt. Retrieved from http://www.creditcards.com/credit-card-news/average-credit-card-debt.php
(Picchi, A.)(2015, March 10). America’s Skyrocketing Credit Card Debt. Retrieved from http://www.cbsnews.com/news/americas-skyrocketing-credit-card-debt/
(Parrish, L. and Harnick, E.)(2014 June). State of Lending: Debt Settlement. Retrieved from http://www.responsiblelending.org/state-of-lending/reports/12-Debt-Settlement.pdf