If your credit card debt is out of hand, you’ve got plenty of company.
After COVID-related stimulus spending helped Americans pay off more than $80 million they owed on credit cards, inflation that’s affected gasoline, groceries and housing has caused a huge spike in credit card debt.
According to the Federal Reserve, credit card use skyrocketed 19.6% from March to April to reach $1.103 trillion, breaking the pre-pandemic record of $1.1 trillion. Credit card balances reached $841 billion in 2022.
To make matters worse, the Fed is raising interest rates to bring inflation under control. When your credit card interest rates go up, it will be harder and take longer for you to pay off your balance.
If this is your situation, the time to do something about it is now.
Credit Card Debt Relief Options
Assorted options — none of them without a certain amount of pain, alas — exist for consumers serious about burying their credit card debt. Here are some choices that could provide the debt relief you seek.
Borrow from Home Equity
If you own your home, and if there is substantial equity in it, and if you could refinance and take out some cash to liquidate your high-interest credit card debt, and if that would free up extra money in your budget, and if you were absolutely certain you wouldn’t start charging beyond your means again … maybe a visit with your friendly mortgage lender, or a competitor, would make sense.
But that’s a whole bunch of “ifs.” The point here: You’re putting your home at risk.
Before you embark on such a radical move, consider scheduling an assessment of your budget and options with a nonprofit credit counseling agency. Their experts are likely to have ways out of your credit card debt hole you never imagined.
If you have good credit, debt consolidation is an option for making it easier to pay off what you owe on multiple credit cards. The concept is simple: Roll several high-interest credit card balances into a single loan with a single monthly payment. This works especially well if you can do so at a significantly lower interest rate. This can reduce your monthly payment or shorten the payment period.
Having an excellent credit score isn’t absolutely necessary, though it is preferable. Still, it is possible to get debt consolidation loans with bad credit, as low as a 580 FICO score, especially if you’re willing to get a secured loan, which is backed by your home, car or other property.
Credit Card Balance Transfer
Are your credit card balances ringing up high interest charges? Assuming your FICO score hasn’t gone south already, consider a balance transfer card. Shop for a credit card that charges zero interest for a year or more and rolling as much of your debt onto that as you can. Be wary of the new card’s interest rate after the honeymoon period (usually 12-18 months) and now that you’re back in your familiar self-denial mode, attack the balance for all you’re worth.
Even if you don’t have property for collateral, you may still be able to get a fixed-rate personal loan (also known as a debt consolidation loan) with an interest rate lower than what you’re paying on your credit cards. The lender must be willing to loan based on your ability to repay. To get a personal loan, banks, credit unions, online lenders, family, and friends are the best choices.
Obviously, the better your credit score, the more likely you’ll get a loan at the best rate. To figure out how much you’ll have to pay and how quickly you can pay off your credit card debts with a personal loan, use a debt consolidation calculator.
Speak with Your Credit Card Company
While you’re at it, contact your credit card companies about lowering your credit card interest rates, waiving fees, or both. Competition among lenders for reliable borrowers is fierce. As a result, says a year-old study by CreditCards.com, some 80% of customers who request a break get one — especially if they threaten to stop using their cards, and shift their balances to one of those zero-interest cards mentioned above.
Some credit card programs offer hardship programs, particularly to customers with a good payment record. Such programs provide relief when situations like losing your job or health setbacks hurt your ability to pay. Relief might include lower interest or fee waivers.
Talk with Nonprofit Debt Counseling Company
Talk to a nonprofit debt counseling company about a debt management plan that allows you to pay your credit cards in full, but at a reduced interest rate, or with fees waived, or both. Because they know their mutual clients are being coached through challenging times with honorable intentions, credit card companies work hand-in-glove with credit counselors to offer you an affordable monthly payment that eliminates debt in 3-5 years.
Beware, most of all, debt settlement companies that claim they can eliminate some or all of your unsecured debt. While they negotiate with your creditors, you will need to stop paying your credit cards, which can severely damage your credit rating.
Declaring bankruptcy can help people out of a big financial jam if all else fails, offering a second chance. A judge and court trustee examine your assets and liabilities and the court decides whether to discharge the unsecured debts, so that you’re no longer obligated to pay them, or dismiss the case if it believes you have enough assets to pay your bills. There are two personal bankruptcy options available.
Chapter 7 bankruptcy is known as liquidation bankruptcy, which means some of your assets may be sold to pay your creditor as much of what is owed as possible. It allows you to keep property necessary to live, such as your home, car (to a certain value), and necessary household appliances and furnishings. The Chapter 7 bankruptcy process moves more quickly (4 to 6 months), but it only is available for those with limited income and will bruise your credit score and remain on your credit record for up to 10 years. Among the debts it doesn’t discharge are student loans, alimony, child support and tax liens.
Chapter 13 bankruptcy gives you a chance to keep your property and reorganize your finances so you can pay off your debt. The process, however, is much longer (3 to 5 years).
Debt Repayment Strategies
That debt isn’t going to pay itself off. You need a plan of attack that, with time and persistence, will get your debt under control. Fortunately, three strategies have good track records for doing just that: debt snowball, debt avalanche and automating payments. Find one that you think will work for you.
The debt snowball, or “debt dash,” are two names for an identical approach, attacking the lowest balances first, no matter what their interest rates.
Yes, it’s counterintuitive. Lots of folks, professionals, and lay people alike, stress mowing down the debt with the highest interest rate first. Makes sense, right? Interest never sleeps, and the higher the interest, the higher the financial pain.
Fascinatingly, what makes sense doesn’t necessarily make the best strategy.
According to a 2016 report published by the Journal of Consumer Research, borrowers gain motivation, and debt-relief momentum, by concentrating first on the lowest balance.
Borrowers who knock off the lowest balance first get excited about seeing that zero, and that revs up their progress. They take the money freed up, and slash into the next lowest balance. And so, the process snowballs, or becomes a dash. Pick your metaphor.
Just be certain your extra payments go against principal; some lenders will attempt to apply the extra payments as, well, extra payments.
As referenced above, paying off the highest interest debt is called the debt avalanche. When you’ve paid off card with the highest rate, work on the second one, and so on until you’ve eliminated your debt.
This doesn’t provide the emotional satisfaction of quick and relatively painless successes like the debt snowball method. But if you are diligent, you’re almost sure to save more money this way because the higher the interest, the faster your debt grows.
If one of the reasons your credit card debt has ballooned is that you incur late fees because you haven’t always paid your monthly bill on time, consider automating your payments. That way, you won’t have late fees that make your debt worse. Rolling up late charges is one of the worst mistakes you can make when paying off debt.
How Credit Card Debt Relief Programs Work
Let’s dispense with the riskiest credit card debt-relief program first: the so-called “debt-settlement” companies. These outfits attempt to negotiate a lump-sum payment that they say will be at least 50% less than what you owe.
But getting to zero can be an onerous business: The “settlement” company arranges for you to put a set amount of money in an escrow account each month and stop making payments to your creditor(s).
The Federal Trade Commission outlines any number of risks to this scheme, not least of which is that your credit score will plummet with no guarantee that you’ll ultimately get out from under your original debt … which will grow from nonpayment.
And even if the promised 30%-to-60% percent balance elimination comes to fruition, guess what: You probably will be on the hook to the IRS for taxes on the forgiven debt. In most cases, the agency is directed to regard such debt elimination as ordinary income.
Instead — at the risk of sounding like a broken record (which we can safely say again, now that vinyl is back) — consult with a nonprofit credit counseling company. Your counselor and his/her team of experts will arrange affordable terms with your lenders for paying off your debt in 3-5 years. Meanwhile, , in most cases, they’ll help you into a plan that consolidates all your unsecured debt into a single, manageable monthly payment at an interest rate of 8%, sometimes even lower.
Everybody wins. Especially you, who will be wiser, and perhaps not as sad as you were when your credit card debt had you feeling overwhelmed.
» Learn more: How Does Debt Relief Work?
Credit Card Debt-Relief Companies: What to Look for
Make sure you’re dealing with a nonprofit credit counseling organization. If it’s debt consolidation you’re after, your counselor or online source can help free of charge.
You’ll also get help designing a workable budget that considers all your monthly income and expenses, with an eye to establishing how much money you have available to target your consolidation.
The top features of the best debt-consolidation companies:
- Nonprofit organization
- Low fees
- Lower interest rates than you’re paying now
- Affordable monthly payments
- You’ll get into a program that zeroes your debt in 3-5 years, sometimes less.
But be careful. In addition to legitimate debt-relief companies, there are credit repair scams whose only purpose is to take your money with nothing in return. Even worse, they can further damage your credit. If they want money up front and make too-good-to-be-true promises, stay away.
Credit Card Debt Relief Myths Debunked
You know what they say: If it sounds too good to be true, it probably is. That’s especially true with companies that claim they can settle your debt for far less than you owe. As we’ve seen, the FTC is all over this with flashing lights and sirens.
But let’s take a deeper dive:
- Think you can get your credit-card balances cut in half for any reason at any time? Think again. Debt settlement is for borrowers in dire straits, such as a job loss, a divorce, medical problems or some other major life incident. Getting credit card debt waived just because you feel like it, isn’t going to happen.
- You have to pay someone to help settle credit card debt, right? Not necessarily. We mentioned a few tools above — snowball/debt dash, asking your lender for relief, rolling debt into a single lower-interest loan — that are available to anyone with the slightest bit of resourcefulness.
- Doesn’t getting out from under all these bills mean paying upfront to the debt settlement company, which then is in control of my money? Wrong again. Not since October 2010, when the FTC blocked debt settlement companies that market their services from collecting advance fees.
- Debt settlement won’t harm my credit score, right? You will get dinged and could get dinged almost as badly as if you declare bankruptcy. Asking for a settlement won’t hurt, but getting debt waived will drop your score from 100-200 points.
- Maybe you’ve heard using a debt-settlement company is cheap. You heard wrong. Most debt-settlement companies charge on a percentage basis, based either on your total debt, or on the amount forgiven. … And then there are those penalties you rack up for overdue payment, added interest and income tax implications, which surely won’t be inexpensive.
- If I don’t settle, or resolve it, my debt stays on my record forever. Actually, no. Collecting a debt has a statute of limitations, usually 4-5 years, depending on what state you live in. Which is why, if you have an ancient debt on which the lender went silent, you should be wary of renewed attempts to reinitiate payment; you might be targeted by a collector who has bought your old, time-barred debt.
- If I’m hopelessly behind, debt settlement or bankruptcy are my only options, right? It depends on your circumstances. Did you lose your job? Call your creditors; they may grant you forbearance — that is, they may reduce or suspend your payments for a while. … Meanwhile, contact a nonprofit credit counseling service to help you get reorganized, and to go to bat on your behalf.
- Well, at least when the negotiations are completed, I’ll be out of debt. Not so fast. Several debts do not qualify for settlement: student loans, taxes owed, child support, alimony. Secured debt — on a house, a car, a boat, or a collateralized personal loan — can’t be easily settled, unless the security is repossessed, or demonstrated to be worthless.
A Cautionary Tale
Once upon a time I had a colleague, a young fellow just out of college in his first full-time job. We were going to get an after-work drink one evening when, unexpectedly, he said, “I love having a credit card. It’s great. I can buy anything I want, and at the end of the month, I just have to send them $25. Is that a great deal, or what?”
I should point out that my colleague had a quirky sense of humor combined with a classic Midwesterner’s modesty with money, so I’m pretty certain he was kidding.
But for too many of us, what he said as, probably, a gentle poke in the ribs is how we live our financial lives. A credit card opens a universe of opportunities. We use them to get stuff, buy gifts, go out on the town, have adventures, and when the bill comes, we don’t look at the balance — heck, we avoid looking at the balance — but instead focus on the minimum payment. How much do we need to send the lender to let the good times keep rolling?
We have to arrest that sort of thinking before it ruins us, and all we’re able to think about is credit card debt relief. Be smart about credit card usage from the start, and your financial joy will be everlasting.
Don’t Hesitate to Get Help Paying Off Your Debt
Consulting a credit counselor can provide help, if only to help you best understand your options. They can help you with the basics of finance, deal with creditors or craft and get through a payment plan.
Although the strategies listed above have proven histories, you might want help deciding which one fits you best. A credit counselor is a good place to start.
About The Author
Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it in 2012, helping birth Debt.org into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering the high finance world of college and professional sports for major publications, including the Associated Press, New York Times and Sports Illustrated. His interest in sports has waned some, but he is as passionate as ever about not reaching for his wallet. Bill can be reached at [email protected].
- Dickler, J. (2022, June 9) Credit card balances spike to $841 billion after stimulus checks helped reduce debt. Retrieved from https://www.cnbc.com/2022/06/09/credit-card-balances-spike-after-stimulus-checks-helped-reduce-debt.html
- Nicastro, S., and Veling, J. (2021, August 5) 5 Ways to Consolidate Credit Card Debt. Retrieved from https://www.nerdwallet.com/article/loans/personal-loans/consolidate-credit-card-debt-personal-loan
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- Segal, T. (2021, March 24) How Do I Pay off My Credit Card Debt With a Home Equity Loan? Retrieved from https://www.investopedia.com/ask/answers/110614/home-equity-loan-good-way-pay-my-credit-card-debt.asp
- Barone, A. (2022, April 21) How Credit Card Balance Transfers Work. Retrieved from https://www.investopedia.com/credit-cards/balance-transfer-credit-card/
- N.A. (ND) Comparing the snowball and the avalanche methods of paying down debt. Retrieved from https://www.wellsfargo.com/goals-credit/smarter-credit/manage-your-debt/snowball-vs-avalanche-paydown/