Dealing with Personal Debt
Credit card issuers are aggressively increasing credit card rates make up for revenue lost during the credit crisis and from the regulations of the CARD Act. This is putting many cardholders into a tight squeeze.The only way to protect yourself against higher rates is to pay off your credit card debt.
Here are some consumer tips to reducing your personal debt:
1. Understand that paying off debt won’t be easy. It took time to accumulate this debt, and it will probably take even more time to pay it off. Do not get discouraged or give up. Eliminating debt and building a secure financial foundation for yourself or your family is worth the sacrifice.
2. Get an honest assessment of how much you owe. It may have been easier to pay the minimums without looking at the total amount that you owe, but misleading yourself will not get you out of debt. Collect all of your bills with outstanding debt including credit cards, mortgage, student loans, personal loans, auto loans and bank loans. Write down a debt summary that includes the creditor, monthly payment, interest, balance due, credit limit and due date for each loan.
3. This debt summary may be overwhelming, so prioritize which bills to pay first. If you don’t have enough money to pay all of your bills, start with the bills that are a necessity for basic groceries, health, shelter, and basic transportation. Next, pay the secured loans such as your car loan. Payments on unsecured loans, such as most credit cards, should come last.
4. Contact your creditors to negotiate lower rates. The less money you pay in interest, the more money you have to pay off your bills. If your lender does not offer a lower rate, then shop around for a mortgage or credit card with a lower rate.
Unfortunately, negotiating lower rates for credit cards is now more difficult because credit card issuers are raising rates to stay in business.
5. If you are in danger of missing a payment, or defaulting on your credit card loan, contact your credit card issuer as soon as possible. Your issuer may work out a payment plan with a lower rate or monthly payment if it will help keep your account out of default.
Default rates are now above 10% for many issuers; issuers have lost the amount of loan on 10% of their cardholders, this is an alarming statistic for issuers. This means that loan defaults are a costly and growing problem for banks. As a result, they have become more helpful and open to working out payment plans to keep you paying something toward your debt.
If the first person you speak with can’t help lower your rate or make adjustments to your account, ask to speak with a supervisor or someone who can. Persistence may be necessary to find the person will help you. Explain that you are in debt, the steps you are taking to repay it, and what you can pay today. Document all conversations, including whom you spoke with, and the date, time, and the results.
Major banks have also created a website and offer toll-free assistance to help you make your credit card payments.
5. Pay off the card with the highest APR first. Continue to pay the minimum on your other cards until you pay off the card with the highest rate. Then focus your effort on the card next in line.
After you pay off the card, keep it open, especially your oldest cards. Issuers are closing inactive accounts to reduce their lending risks. Losing this available credit can lower your debt utilization ratio which will lower your credit score.
6. Pay more than your minimum payment. Your minimum payment is usually only 2-5% of your balance. At this rate, it will take you many years to pay off your debt. Start with the card with the highest interest rate and try to double your minimum payment.
Here is an example of the benefits of paying more than your minimum balance: assume you have a credit card balance of $8,000 and your interest rate is 12%. If you pay just the minimum payment of 2% each month, it will take 346 months to pay off the balance and will cost $7,696 in interest. If you pay 5% of your balance each month, it will take 113 months to pay and cost $1,974 in interest.
Starting in February 2010, if you pay more than your minimum payment, issuers will apply this amount to your balance with the highest APR.
7. Transfer your balance to a card with a lower rate. If your rate is above 12%, look for a card that offers 0% for 6-12 months. To take full advantage of this 0% interest, pay as much as you can above the monthly minimum.
Balance transfers are not the generous offers that they used to be and the balance transfer fees have increased to 5%. The offer you receive may be based on your credit score. Carefully read the terms and conditions about the fees, rates, and length of the offer. Be aware that issuers are cutting credit limits and you may receive a smaller limit for your balance transfer.
Only use this card to pay off your existing balance. Do not add to your balance with new purchases.
8. If you have a credit card balance, stop using it for anything other than necessities. Use cash instead.
If you carry a balance, you are paying interest for every purchase, including clothing, entertainment or dinner. Factor that in to each purchase. For example If your APR is 15%, ask yourself if the purchase is worth paying an additional 15% in interest per year.
Paying with cash will not only save money on interest, but it will also reduce the amount you spend. Shoppers spend 12% to 18% less when using cash.
9. Pay your bills on time, every time. Credit card issuers are looking for reasons to raise your rate. Even one late payment can trigger a rate increase.
10. If you are surprised by your current rates, check your credit report. It may contain an error that lowered your credit score, causing creditors to increase your rates.
If you find an error on your credit report, contact the credit bureau to report it. They must respond to your claim in thirty days or remove the information that is incorrect or unverifiable. You can dispute by mail, telephone, or online. If the corrected error results in a higher credit score, alert your creditors to this and ask for a lower interest rate.
11. There is good news. If you build a history of paying your bills on time every time, and start paying down your debt, you lower your debt and raise your credit score. As your credit score increases, ask your creditors for lower rates.