Credit cards offer many personal finance and lifestyle benefits – you can build your credit balance, have a safety net for spending, and sometimes even access cardholder benefits such as airline miles, discounted purchases, and concierge services. However, with all the potentially positive aspects of becoming a cardholder, there is also the possibility that your finances … get complicated.
According to Debt.org, the typical American has four credit cards and individual households have an average of $ 8,398 in credit card debt. Paying back that balance can be quite difficult for many people, especially when you are in a (seemingly) never-ending cycle of revolving debt. How do you stop the cycle?
This post introduces four strategies you can use to find credit card debt relief. We'll review their pros and cons and help you compare your options to find the best solution for your situation.
For details on a specific debt relief method, see the links below, or read it in full for a more in-depth look at how to get help with credit card debt.
What is Debt Relief?
Debt relief is a series of strategies that help individuals deal with debt. The aim of debt relief is to give indebted persons a certain amount of leeway to repay their creditors, be it by extending the term of a loan, lowering interest rates, paying off the debts for less money than originally owed or partially or completely discharging the debt through bankruptcy .
Of course, using these debt relief methods can have a huge impact on your financial future, sometimes for better, sometimes for worse. We will discuss these options and the risks involved and Benefits a little later in this post.
Should You Look For Debt Relief Opportunities?
Before we dive into debt relief, it is a good idea to take a closer look at your finances to determine whether you need to take debt relief measures and which measures make the most sense for your circumstances.
You may be able to manage debt independently if:
You can adequately repay your current debts within five years. You may not need to take any debt relief measures beyond budgeting by coordinating with your collection agencies and managing your other lines of credit.
For more information on DIY debt management, check out our post on debt settlement methods.
You might consider debt relief if:
You are faced with significant credit card debt and are having difficulty finding a repayment solution with your creditors. When this happens, you may want to take a more aggressive approach to finding debt relief. These methods can range from loan counseling to filing for bankruptcy depending on your circumstances and preferences.
Bottom line: If you are having trouble managing your credit card debt, it is probably time to get help in ways that make sense for your personal finances. For more serious debts, using debt relief measures may be a suitable option.
Credit Card Debt Relief Strategies
If you do decide to move on with debt relief, it is worth considering your options in the context of your own finances. Depending on your debt, other financial obligations, and income, one situation is likely to make a lot more sense than the other. It just comes down to understanding the basics and weighing the pros and cons.
With that in mind, let's take a closer look at some of the debt relief options you may have access to.
Debt management plan
A debt management plan (DMP) is a program where a debt relief company negotiates with creditors on your behalf to come up with a repayment plan that will help resolve your debt. Typically, the two parties will agree to lower monthly payments, lower interest rates, minimize or eliminate penalties, or use a combination of these measures. Then, if agreed, you would make monthly deposits with your credit counseling organization who would facilitate the payments on your behalf. A debt management plan usually gives the debtor 3-5 years to pay off the balance.
Benefits of debt management plans:
Simplifies your budget and makes paying off debts easier
Can help you stay organized and meet bills and deadlines, which can help improve your credit score
Establishing a plan can reduce or eliminate contact with debt collection agencies
Risks of debt management plans:
You may not be able to apply for additional lines of credit while enrolled on a debt management plan.
If you make late payments during a DMP, you can fall back into a debt cycle and find yourself in a worse situation.
What You Should Know About Debt Management Plans
Once you've thought about the pros and cons of a debt management plan for your finances, you can reach out to a credit advisor to get you started. Once you and your credit advisor have successfully negotiated a debt management plan with your creditors, consider these best practices to help keep your outstanding debts in check:
Write down what debts are on a DMP and which are not. That way you can better manage your monthly bills and keep track of where your payments are going.
Make sure that you make your monthly payments to your credit counseling center on time – you don't have to put additional strain on your finances!
Coordinate with your credit advisor to ensure that your debt payments are made correctly and on time. Request monthly bills so you can review and track your balances. Not all credit counseling services are created equal, as is your pre-registration due diligence.
Debt consolidation enables those in debt to consolidate multiple outstanding unsecured debts into a single new loan that ideally can be repaid at a lower interest rate than what you previously paid. Basically, you would start a new loan to pay off your other unsecured debts such as credit card balances.
For example, let's say you had four credit cards that you owed a balance, each with an interest rate of about 20%. By consolidating your debt, you can apply for a new loan to pay off these four credit cards. Once these cards are paid out, only your consolidation loan remains at an interest rate of 18% (the average interest rate on a debt consolidation loan is 18.56%). In this example, debt consolidation can make the monthly payment a little easier for you as your interest rate is lower and you only have one loan to pay instead of four separate credit card bills to worry about.
Benefits of Debt Consolidation:
You may be able to qualify for a lower interest rate.
You can optimize your bill payments to make personal finance management easier.
You can work on improving your balance by making more workable monthly payments.
Debt Consolidation Risks:
The combination of your debts could mean that you will be in debt for a longer period, albeit at a lower interest rate.
Paying a lower interest rate for longer can result in more money being paid out in the end.
The interest rate on your consolidation loan may change depending on the loan agreement.
If the rate is fixed, it does not change, but the floating rate can fluctuate.
Note: There are significant differences between consolidating to a personal loan and another credit card. When you partner up on a loan, the terms are likely to be shorter than a credit card and the monthly payments may be higher. Also, if individuals team up on a personal loan and then build up a CC balance again, credit scores are now even more affected, which can result in a significant deduction in credit scores.
What You Should Know About Debt Consolidation
If debt consolidation is the best method of debt relief for your situation, keep these tips in mind:
If you're struggling to make monthly payments on your current credit card bills, it's probably better to consolidate your debt than to skip payments. Skipping payments can result in fines and negatively affect your creditworthiness.
After consolidation, make it a priority to submit timely and accurate payments.
To prioritize your debt payments, first calculate your budget and make the necessary adjustments.
Debt settlement is a credit card relief strategy that aims to pay off debts for less than the total amount agreed by the creditor. Once a settlement agreement has been reached, the debtor usually has to make a lump sum payment to settle the total amount due. Consumers can try debt settlement on their own or with the help of a debt settlement firm.
Note: When using a debt settlement firm, keep in mind that you need to consider the fees owed to the firm.
Benefits of debt settlement:
You can minimize the amount of your debt.
By paying off the remaining balance as a lump sum, you can get rid of your debt immediately, rather than over a long period of time
Paying off debts is one of the cheapest methods of debt relief when service fees are considered.
Debt Settlement Risks::
Paying a debt for less than the amount you originally owed can have a negative impact on your creditworthiness.
A lower credit score can later affect your eligibility for loans and other lines of credit.
Paying off debts can have a huge impact on your income taxes. Because the IRS classifies outstanding debt as income, the amount will still be included in your gross annual income. In general, the higher your income, the more tax you owe.
When you hire a debt settlement firm, additional bills are added to your budget, which can make it difficult to pay off your debt in full.
What you should know about paying off debts
The FTC warns consumers to research debt settlement programs before enrolling. Check with the Attorney General or your local consumer protection agency to find out if there are any consumer complaints with the debt relief firm you want to work with.
Additionally, consumers should be aware of debt settlement fraud and avoid partnering with a company that:
Collects fees before paying off your debts
Touts a "new government program" to save personal credit card debt
Guaranteed that your unsecured debts can go away
Asks you to stop communicating with your creditors, but does not explain the serious consequences
Promises to stop all debt collection calls and lawsuits
Ensures that your unsecured debts can be repaid for pennies on the dollar
Bankruptcy is a federal court that gives consumers the opportunity to "start over" with their finances by forgiving debts that cannot be paid. Instead of paying the balance owed, creditors may request some repayment by confiscating the individual's personal or business assets.
Consumers who file for bankruptcy usually apply for bankruptcy under Chapter 7, 11 or 13:
Chapter 7: Provides debt relief in exchange for ownership of certain assets of the consumer or his business. Valuable possessions, property, cash, stocks, or bonds must be liquidated to repay some or all of the debt owed.
Chapter 11: Allows companies to reorganize, revise business plans, cut costs, and focus on increasing profits, ultimately returning to profitability. Some Chapter 11 procedures require a company to sign up for a debt settlement plan in order to process outstanding debt. Typically, Chapter 11 bankruptcy is used for businesses, but in rare cases it can be filed on behalf of an individual.
Chapter 13: If an individual is making too much money to qualify for Chapter 7 bankruptcy, they will generally opt for Chapter 13. This form of debt relief allows both businesses and individual consumers to have a convenient debt settlement plan that without losing ownership of their respective property.
Benefits of bankruptcy:
Bankruptcy gives you the option of wiping debt off your record so that you can hit some sort of "update button" on your finances.
Depending on the type of bankruptcy you are filing for, you may be able to pay off your debts while maintaining some or all of your assets.
Bankruptcy can have a significant impact on your creditworthiness, making it harder to apply for new lines of credit, start doing business, or be approved for a loan in the future.
Chapter 7 bankruptcy will appear on your credit report for ten years and Chapter 13 will remain there for seven years.
More tips on debt management
With US household debt increasing, many Americans are looking for ways to take control of their finances. After all, debt management can be one of the most difficult financial obstacles to overcome.
As you weigh your deleveraging options, keep these general debt management tips in mind:
Compare different debt settlement methods that are appropriate for your situation. Two of the most common approaches are:
Snowball: Pay out the smallest balance first.
Avalanche: Pay off debts with the highest interest rates first.
Try to keep your debt-to-income ratio below 36%.
Calculation of the DTI: (monthly total debt repayments ÷ monthly gross income) ✕ 100 = DTI%
Set up automatic payments for all outstanding credit card and credit accounts so you don't miss any payments.
Use Your budget as a tool to free yourself from debt and work towards a more fulfilling financial future.
The central theses
Credit cards can be a useful financial tool for those looking to build their credit, receive special rewards, and gain a sense of financial independence. However, it is important to understand how credit card debt can affect your financial situation. If you implement responsible spending habits, use your budget to monitor debt and financial wellbeing, and research your debt relief options, you are well on your way to living debt free.
With the help of Mint you can gain important insights into the current state of your finances and plan for the future. Click here to learn more about how Mint can help you meet your goals.