If you’re concerned about having to pay down credit card debt, you’re not alone. Almost half of Americans carry a credit card balance. The average balance owed by each credit card owner is $3,573, according to a recent Gallup report.
Given the high interest rates credit cards charge – current rates are around 16% – the monthly payments may be a hit to your bank account every month. So how much would it cost you in interest, if you only make minimum payments on your credit card debt? If you make just the minimum monthly payment on $3,573 (interest + 1% of principal) , it will take you nearly 20 years to repay your debt. Not to mention the $4,224 in interest payments.
Why Pay Down Credit Card Debt? What Are the Benefits?
Given such sobering statistics, it makes sense to repay your credit card as soon as possible. Paying down credit card debt has two primary advantages.
- It saves money on interest payments
- It can improve you credit score. The total amount you owe is a big factor in your credit score. It is arrived at through the credit utilization ratio, which is the amount of credit you are using vis-à-vis how much you have available. That ratio makes up 30% of a credit score. Lowering the utilization ratio – which paying down debt will do – could improve your credit score.
Credit scores are important. Without a good credit score, you’ll find it very difficult to get a home mortgage or an auto loan. Also, employers and landlords increasingly look at them to determine your financial reliability.
What Are Some Strategies to Pay Down Credit Card Debt?
Take heart. There are many strategies to pay down credit card debt. Here are six.
- Cut your monthly expenses. Even if you’re deeply in debt, trimming back monthly expenses would allow you to pay more on your credit cards per month and reduce your debt load faster. Can you take lunches to work instead of going to restaurants? Carpool to work, or take public transport? Brew your morning coffee instead of hitting Starbucks? Eat out less often?
- Take advantage of lower interest rate cards. Right now, interest rates are very low, and they’ve fallen recently. You might be getting offers on lower interest rate credit cards to entice you into opening a new card. Some cards also offer teaser rates that are good for a short period of time.
Look carefully at the fine print, but putting some (or all!) of your debt on a card that is offering 12% interest will result in less payment per month than keeping it at 16%. This method is particularly effective if you can transfer it to a balance transfer credit card with a 0% APR introductory rate.
- Use savings to pay down your debt. We know, we know. Everyone needs savings as a cushion. But the fact of the matter is, credit card debt is costing you 16% APR a year. You are getting far less than that in any savings account. One way of looking at it is that every dollar you have in the bank is losing 16 cents a year for as long as you have credit card debt. Paying off credit card debt is an excellent investment. You can also consider liquidating savings held in stocks or a 401K.
- Renegotiate your interest rate. Contacting your bank to renegotiate your current interest rate down is a smart option. A lower interest rate equals a lower monthly payment. Especially in times of low and falling interest rates, it is worth a shot. Be sure to prepare talking points about how this would benefit both you (lesser payments) and the bank (you won’t have to declare bankruptcy).
- Declare bankruptcy. Bankruptcy is an option, but frankly not a good one. A bankruptcy will stay on your credit report for 10 years. Not only that, bankruptcy itself costs money. You have to hire attorneys and file paperwork. Bankruptcy may also require you to liquidate some or all of your assets.
- Negotiate a debt reduction plan. This involves contacting the banks and asking them to settle the debt for less than what you owe. If you have had to miss payments, are simply unable to pay, or considering bankruptcy, your bank may be considering selling it to a debt collection agency. The amount your bank may receive could be just $0.20 or less per $1.00 owed. It may, therefore, it may be worth it to your bank to let you pay the debt for less than you owe. That way it can recoup more than what it would get from a collection agency.
There are some risks to this. First, if you have multiple creditors, it is possible not all of them will settle. This may leave you paying some while having to settle fixed amounts with others, which could financially overextend you yet again. Debt reduction will also have a negative impact on your credit score, but late payments and “not paid in full” accounts will stay for seven years on your credit report instead of 10.
Do You Qualify for a Debt Reduction Plan?
Debt reduction companies determine eligibility by looking at your financial situation. They will ask questions, such as: is the debt due to financial hardship? Was your credit card debt load caused by medical bills, job loss, or divorce? Situations like these can explain the existence of legitimate financial hardship, rather than a person looking for a quick fix for frivolous and irresponsible spending.
The second issue is whether the debtor has sufficient resources to put a debt reduction plan into effect. Although a debt settlement will reduce how much you owe, you still need to be able to pay off a lump sum. Debt reduction companies will likely look at both your monthly income and assets to determine how much you can afford to put toward lump-sum payments.
Should You Attempt to Reduce Debt Yourself or Not?
Doing it yourself depends on two factors.
- First, how much do you owe? Debts of $7,500 or less are sufficiently manageable that it might be possible to renegotiate it yourself.
- Second, how comfortable are you at negotiating? How much time do you have to spend on negotiating? Remember, banks do not have to respond favorably, and it might take considerable negotiation (as well as considerable time and effort) for a settlement to be reached.
Benefits of Having an Agency Do It for You
Debt settlement firms are well-versed in how to negotiate settlements and have extensive business knowledge. If you have significant debt, the amount you pay a debt settlement company could be outweighed by the savings they are able to gain for you. Unlike bankruptcy attorneys, debt relief firms don’t charge upfront fees for their services.
What to Look for While Hiring a Company
If you are considering using a debt settlement company, it is very important to pick one that reliable and experienced.
By law, debt settlement agencies cannot charge any fee upfront for debt settlement services, per the Federal Trade Commission in 2010. Never engage a firm that tries to charge you upfront for debt settlement services.
Inquire into how they do charge for their services. Some may charge a monthly maintenance fee. Avoid them. Leading firms have performance-based fees. This is the best way to go since you only pay if the company is successful in lowering your overall debt.
Federal and state regulators issue cautions about debt settlement agencies that promise relief to consumers but end up taking their money and not providing any help. Choose firms that ensure all their debt arbitrators are certified by the International Association of Professional Debt Arbitrators (IAPDA) and that are members of the American Fair Credit Council (AFCC). These associations hold their members accountable to following the best practices of the industry.
SuperMoney’s company profiles and user reviews provide information to assist you in finding the best debt settlement companies. If you’re not sure whether debt settlement is for you, click here for a free consultation with a debt settlement specialist. You will find out if you qualify for a debt settlement program and there is no obligation to go ahead with the program. Be an informed client. Ask about the effects debt settlement can have to your credit score and your tax liability.