What happens when just meeting the minimum payments is beyond your means and you’ve come to the tough realization you can’t afford to pay your credit card bills? Take a deep breath.
If you comb through your credit card statements, odds are there are a few ways to save money. There can be plenty of solutions to your credit card debt, if you act accordingly.
“The longer you wait to address a credit card problem, the costlier your situation can become,” says Bruce McClary, National Foundation for Credit Counseling Vice President. “Falling behind on your payments can lead to higher interest rates, additional penalty fees and a drop in your credit score.
“All of those unfortunate consequences can have a ripple effect that places other financial priorities in danger. Although time is not your friend when you are in a credit crisis, you should never think it is too late to reach out for help.”
This is a temporary setback. Everyone has dealt with credit card debt at some point in their life. Let’s tackle the problem today!
Contact the Card Issuers
Rule No. 1 is, let your creditors know you’re in financial trouble. Explain your situation. If you have a financial hardship — you’ve been laid off, or run into unexpected expenses — they’re more likely to cut you some slack if you lay out the facts. Even if it’s merely an overspending problem, if you’ve been punctual until now, you may be given leniency.
“They may be able to give you a little relief while you get your financial situation in order,” McClary says. “But if you don’t ask, you will never know what they can do to help you avoid falling behind on your payments.
“While there is no guarantee how they might be able to help, it’s possible that they might allow one month of an interest-only payment or even permission to skip a payment.”
You won’t be the first distressed customer ever to contact your creditor. Ask what they typically do for others in your predicament.
While you’re at it, try to reason with your creditor. Sending a partial payment without explanation won’t help; offering to do so while talking with your creditor’s representative just might.
As you attempt to work things out, don’t make promises you cannot keep.
Consider Credit Counseling
What you need is a hand up. Experts rarely go at it alone. Pro golfers rely on coaches. So do the best tennis players, Pro Bowl quarterbacks, and All-Star baseball players
Why shouldn’t people who are unsuccessful at managing money, recruit experts, too? That is what certified credit counselors do. They coach you through your financial problems.
“Talk to a personal finance expert like a nonprofit credit counselor,” McClary said. “They can give you personalized guidance that helps get you past your credit card challenges and back on track toward your financial goals.”
No less than federal government watchdog Consumer Financial Protection Bureau agrees, adding, “Before you sign up, ask if you will be charged, how much, and what services will be provided.”
Just as Marie Kondo holds her clients accountable for committing to declutter their lives in pursuit of freedom and joy, so will enrolling in a debt management program with a nonprofit credit counselor guide you toward financial freedom.
Cut Spending & Make a Budget
You do know how to make a budget, right?
If not, you can set one up using any number of free budgeting apps or online budget programs. The key, says Portland, Ore. based money coach Cecilia Case, is “Stop the bleeding. … [People] need to find a way to stop getting themselves into more debt.”
Along that line, Alexandra Tran, a financial blogger and digital marketing specialist with a national e-commerce and logistic company, encourages being obsessed with your bank accounts. She tracks hers daily using Credit Karma and banking apps.
“When I see my money,” Tran says, “I know when I shouldn’t be spending.”
Now would be a good time to examine credit card and bank statements for automatic payments for subscriptions you rarely use, or could do without. If you are behind in your payments or can’t afford to even make a payment, look at what is essential in your budget and what is a luxury.
Going out to dinner three times a week may no longer be in the cards when you lack a steady income. The silver lining is you can resume these spending habits in moderation when you’re back on your feet.
Adding Income Streams
Along with trimming your spending, be alert for ways to increase your income. Do you deserve a raise? Figure out why you deserve it (Tip: The reason can’t be because you need more money; everyone does), draft a proposal linked to your market value, and talk to your supervisor.
See where you might gain a foothold as a freelancer or in the gig economy. Explore Upwork, Fiverr, and TaskRabbit — to name three — that connect people looking for work with those who need jobs completed.
“It’s best to freelance in an area in which you have experience, but it’s not essential,” says Priyanka Prakash, a senior staff writer at New York-based Fundera. “You can start by charging a low hourly rate to attract clients. If you do a good job, you’ll get good client reviews and can raise your rate.”
“There are some amazing ways of clearing debts and sorting out your finances,” says Wiltshire, UK-based financial blogger (ibeatdebt.com) Vicky Eves, “so don’t get stuck in a rut thinking you are limited to one or two options!”
What Eves did is truly novel, appearing on a TV gameshow and winning enough to erase half her debt. Unconventional, sure. Out-o’-the-box? Absolutely? Doable? We’ve heard worse ideas.
Have stuff to sell online? From eBay to Craigslist to Poshmark and beyond, there never has been a better time for getting top dollar for things you can live without.
Above all, do not withdraw. Ducking creditors makes your financial matters worse. Avoiding contact with regular folks can lead to depression and feelings of hopelessness.
“There is a lot of stress that comes with financial hardship so it’s also important to do things to keep up your spirits,” says New York-based Olga Kirshenbaum, owner of Rags to Riches Consulting. “Attending networking events and volunteering can be ways to continue to stay engaged and connected, maybe can lead to your next job.”
You can get back on your feet. And you probably can do it faster than you thought possible. Take action, reach out, consult experts, stay connected, and take control. You’ll be amazed where you are this time next year.
Consequences: Debt Collectors, Lawsuits, & Garnishments
Listen, it happens. An emergency expense pops up. You get waylaid by a medical emergency or natural disaster. The federal government shuts down for more than a month. Or maybe you simply overshot your budget. Whatever the reason, nothing good comes from failing to pay credit card bills. It’s all there in your issuer’s agreement.
For starters: Once they’ve acquired the rights to your debt, collection agencies will pursue you. It’s what they do.
While they are limited by law from outright harassment, threats or making false statements, collection agencies will be persistent, to a point, contacting you in a variety of ways: telephone, text, email, regular mail — until you tell them, in writing, to knock it off. A cease-and-desist letter sent via certified mail is the best way to stop communications.
After that, you likely will hear from them only twice: Once to tell you they’ll stop making contact, and once to tell you (or your lawyer, if you’re represented in the matter) they’ve filed suit in an attempt to recover the debt.
If you do receive a court summons, put it on your calendar. Failing to appear for a court date means you automatically lose.
If the card issuer or collection agency wins a judgment at court — that is, the judge orders you to pay up — the result will be reported to the credit bureaus, sinking your credit score.
If you’re ordered to pay, you could have your wages garnished and/or your bank accounts frozen. Additionally, you could be charged for the legal fees incurred by the card issuer or collection agency for the actions required when attempting to collect.
Avoid for-profit debt-relief companies, and run if you hear any of the following:
- Fees charged before your debts are settled
- Guarantees they can make your debt go away
- You’re advised to stop communicating with creditors
- You’re told to stop making minimum payments
Choosing the correct debt-relief company is just as important as slashing your budget to save money. Do not make your situation worse by rushing into a utopian credit counseling scam. If it sounds to good to be true, it probably will be!
Paying late can trigger a late fee, as much as $25 for a first offense. And it’s tacked right onto your balance, giving you even more to pay back. Subsequent late payments can result in still-higher fees, all the way up to $35.
The good news is, a late fee cannot be higher than the minimum payment due. If you’re late on a $10 minimum, your late fee cannot exceed $10. Accordingly, many credit-card issuers set their minimum payments at $25 or more. Try to do whatever you can to pay on time in order to maintain your credit score and avoid expensive late fees.
Impact on Your APR
Another reason to stay current: Accounts that slip past 60 days in arrears incur harsh interest rate increases, up to 30% in some cases.
That’s bad, right? Worse, your agreement may stipulate, , the penalty rate can continue on new purchases indefinitely.
If you’re juggling credit card bills, some things to keep in mind:
- Some card issuers do not have penalty rates as part of their agreements. Review your agreements to see if that is the case with any of your cards.
- If you have a zero-interest card, make certain you keep it current, or you may lose your introductory rate.
- If you have more than one card from an issuer in your wallet, being late on one of those cards can wind up boosting the APR on the others.
Credit Score Impact
Along with fees and higher APRs, late or missed payments can lower your credit score. Interestingly, card issuers and the credit reporting bureaus have different definitions of “late.” While the creditor can instigate fees and other charges on the first day past the due date, your account is not late in the eyes the credit bureaus until 30 days have lapsed.
Timely payments account for 35% of a consumer’s credit score, so late payments can extract a substantial penalty. Someone with an otherwise pristine record could get docked as much as 100 points for a single late payment. Those with less-stellar credit histories lose fewer points for late payments; unreliability already is baked into their scores.
MyFICO.com lays it out clearly: Additional late payments, as well as payments that go 60 or 90 days or longer past due, can slam a credit score, as can entering into debt settlement (where the creditor accepts less than the full amount owed).
The ‘Partial-Payment’ Myth
Credit-card issuers do not award prizes for participation. That is, they won’t absolve late-payers for sending something less than the minimum due. Absent prior arrangements, your creditor will regard a partial payment essentially the same as a late payment.
A caveat: Several partial payments that equal or exceed the minimum and arrive before your due date will maintain your good standing.
Charge-offs happen when the card-issuer concludes a debt cannot be collected, which usually happens when an account is 180 days in arrears — that is, six months without a minimum payment. A charge-off allows a creditor to claim a tax deduction for a bad debt; this, however, doesn’t mean the debtor is off the hook.
The issuer may continue to pursue what’s owed through a collection agency, or it may sell the account at a deep discount; you, however, will remain on the hook for the full amount.
If your debt is sold, be absolutely certain — if you’re willing and able to make payment arrangements — you’re sending money to the actual new owner of your account. Collection scams abound, preying on unwitting debtors.
Also, you can count on your credit score getting a black eye that will linger for up to seven years. A charge-off, coupled with the record of missed payments, will make it tough to qualify for new credit, from mortgages to auto and personal loans to new credit cards. You might still get one, but it will come with a very high interest rate.
There’s also this to consider: If you’re able to negotiate a settlement for less than the original amount owed, you could be liable to the IRS for the dollar amount forgiven. Check with an income tax expert about the ramifications.
In short, regarding charge-offs, you absolutely do not want to go there.
Bankruptcy for Credit Card Debt
Think hard on this one, because once you commit to bankruptcy, the hangover will linger for a while — 10 years if you choose Chapter 7, a straight bankruptcy in which most of your assets are liquidated to meet your debts, and the rest are discharged; seven years if you choose Chapter 13 reorganization, in which you come up with a plan to repay your creditors, through an intermediary, over three to five years.
Bankruptcy, says Denver-based Latitude Financial Group partner Dan Grote, “is a last-resort kind of situation, but it is appropriate for some situations and it does not mean you’re a deadbeat. It’s a do-over that is appropriate when there is really no other alternative.”
Seek Credit Counseling
Credit Counseling is a logical step on the journey to becoming debt free. A nonprofit credit counseling agency can help you create a debt management plan that’s best fits you. The majority of Americans have incurred credit card debt at some point in their life. You are not alone. Late fees and interest from your credit card debt will continue to harm your credit score and more importantly your wallet. Now is the time to act and finally take control of your credit card debt.
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