Tips For Dealing With Credit Card Debt

photo courtesy freedigitalphotos.net

Struggling with credit card debt can cast a black cloud over every aspect of your life. The longer you stay in debt, the more damage you’ll end up doing to your credit rating. That in turn will make it harder to get a loan in the future for important borrowing like a home mortgage. Not to mention that fact that debts limit your spending power in the present, restrict your options, and generally have a negative effect on your emotions and outlook.

So it pays to get on top of your debts as soon as possible – but how? Here are a few tips you can start applying today to turn your debt situation around.

Negotiate with Your Lender

In many cases you can actually negotiate with your credit card company in order to make paying your debt easier. There are several options available here – for example, you may be able to have your interest rate lowered. You may be able to extend the period you have to pay before you start incurring more penalties, or you may be able to have some fees waived altogether. In any case, the first step is to contact your lender and see if there’s a way you can reduce the burden of the debt.

Pay the Most Expensive Debt First

If you have multiple credit card bills, you need to work out which one is costing your the most in interest and focus solely on paying that bill first. That’s the fastest strategy for paying off the debt. You know to work out which bill is costing you the most in interest – the sooner you pay that bill, the less interest you’ll incur and the lower the overall amount you have to pay back will be.

Make Debts the Priority

Often people end up in credit card debt to begin with because they can’t manage their money and try to live beyond their means. If you have bad financial habits, they’re the reason you’re in debt – and they’ll keep you in debt if you don’t change them. You’ll need to develop the self-discipline to say no to non-essentials until you have your debts handled. If you’re in debt, don’t go spending money on concert tickets and most definitely don’t take on any more debts.

Debt should only be used for things that will help you get to a better financial position in the future – things like buying a house, starting a business or getting an education. If you take out a new debt every time you want to buy a consumer item on impulse – new shoes, a car, a holiday – you’ll just keep digging yourself into a deeper hole.

Summing Up

Credit card debt may seem like it’s impossible to beat, but with a few phone calls to your credit card company and a change in your financial habits and mindset, you can start turning your life around from today.

Don't Pay Off Your Credit Cards! – Not This Foolish Way

It should be clear by now, that here at Money, Debt and Taxes we are big fans of paying off your credit cards.  But when it comes to paying off your debt, it is amazing how much bad advice is out there, even from trusted sources.

Recently I came across an article on The Motley Fool website titled “9 Ways to Pay Off Debt”.  As I read through the article I was screaming at my computer NO, NO DON’T DO THAT!   So here is an abbreviated version of the Motley Fools’ suggestions, and my not so humble comments.

#1. Pay More Than The Minimum Payment on your Credit Cards
So far, so good. I have no problem with this suggestion.   Unless you pay more than the minimum payment it could take you 10 years to pay off your credit card debt.

#2. Snowball Your Debt Payments
Still OK, in fact I am a big fan of debt SnowBalling.  You can read more about debt snowballing at Wipe Out Credit Card Debt.

#3. Cash Out Your Savings Account
WHAT! Excuse Me? Is this the Motley Fool, or some hack. Why would you do that?  The argument the Motley Fool gives is that savings accounts pay a very low interest rate.  You “earn” a better rate of return by paying off a higher interest rate credit card, than you do by leaving that money in a savings account paying a lower interest rate. From a strictly numbers point of view that might be correct, but from a “learning how to manage your money” point of view that is a terrible suggestion.  What do you do if your car breaks down and you don’t have an emergency account?   An emergency account is an essential if you want to get out of debt forever.

#4. Borrow Against Your Life Insurance
I can’t tell you how many ways this is wrong.  First, this is not a way to pay off debt. This is a way to transfer debt.  Second, you can’t borrow against a term life insurance policy, so the Fool is assuming that you have a whole life policy. So you are going to borrow against your life insurance, you may not ever pay it back, so your beneficiaries will get less than you paid for.  I am not fond of whole life insurance, but this just seems like one way to make a bad investment even worse.

#5. Finagle Family and Friends
The idea is you borrow money from family and friends to pay off your other debt.  Once again, you are not paying off your debt, you are changing your creditor.  This has to be one of the worst suggestions of the bunch.  Money issues can be deadly for friendships and devastating for families.  Don’t ever borrow money from friends or family.  Not if you want to keep your friends and stay on good terms with your family.

#6. Get A Home Equity Loan
Sigh, once again we are trying to solve our debt problem by getting more debt.  Plus, we are changing unsecured debt for secured debt.  If you don’t pay off your credit cards you can ruin your credit rating. If you don’t pay off your home equity loan, not only do you ruin your credit rating, you can lose your house.

#7. Borrow From Your 401(k) Plan
Do I sense a theme here?  Are we paying off debt, or are we just moving it?  I know, if it is good enough for the US government it is good enough for you. So if you borrow from your 401(k) plan, what is to stop you from just running up your credit cards again?   Now, if you have been following all this foolish advice, you have tripled your debt, alienated all your friends and family, lost your home, and now you have no money for retirement. (Plus you’ve lost many of the tax benefits a 401(k) plan provides.)  But that is OK, the fools have a plan for you…

#8. Renegotiate With Your Creditors
Yes, your creditors will love you when you call them up and say you can’t pay.  They will be so excited to lower your interest rate and maybe even forgive some of the principal.   You could even call one of those “Secrets The Credit Card Companies Don’t Want You To Know” companies and totally destroy your credit rating.  But that won’t matter, you have to fools to advise you.  Next step please…

#9. File For Bankruptcy
News Flash, this is not paying off your debt!   This is forcing your creditors to accept little or nothing for the debt you have incurred.  In very rare circumstances, bankruptcy is the only option, but for most people, learning how to manage their money will enable them to pay off their debt, save their credit rating, and avoid bankruptcy.

I am afraid I have lost a whole lot of respect for those Motley Fools.   Of their 9 Ways to Pay Off Debt, only 3 are actually ways to pay off debt,  4 just transfer the debt to a different creditor, and 2 involve forcing your creditors to accept less than you owe.

As one commenter mentioned, paying off your debt is really simple.  There is no magic formula.  You just need to do two things.  Make your debt payments, and pay for everything with cash.  Whatever you do, don’t be a fool and follow the advice of the Motley Fool.

If you are serious about getting out of debt I highly recommend Dave Ramsey’s Book The Total Money Makeover. It helped me to become debt free and has changed the financial future of thousands of people.

Secrets The Credit Card Companies Don’t Want You To Know

photo credit Wikipedia

Everytime I hear these ads I just want to scream! DON’T DO IT! I know it sounds tempting. I know you have lots of debt and you don’t know how you are ever going to get out from under it, but trust me, this is one secret you don’t need to know. So this is how it goes. According to Debt Elimination Companies there are secrets the credit card companies don’t want you to know. If you have $5,000 or $10,000 or even $20,000 in credit card debt, just call this respectable sounding debt reduction company(DRC). They will use their secret powers with the credit card companies and eliminate 40-60% of your credit card debt.

Don’t believe it for a minute! Your scam alerts should be going off big time!

How this works is you sign up with debt reduction company and pay them a nice big fee. It can be as high as $3,000. You might even put it on your credit card. It’s OK, they are going to save you thousands of dollars, and even their fee that you just put on your card will be reduced by 40-60%. Then they work with you to come up with just one monthly payment that is less than the mulitple payments you are currently making to your credit card companies. So far so good. But then, instead of sending your payments to your credit card company, you send the payment to the DRC. All is well for a month or two. And then the phone calls will start. Nasty phone calls from people demanding that you pay your bill. They might even call you at work! You see, the DRC has not been making your credit card payments. They have been holding onto the cash. If you call them and ask them why, they will tell you it is all part of the secret. Be patient, don’t let the phone calls get to you, and keep sending your payments to the debt reduction company.

So here is the secret the credit card companies don’t want you to know. If you don’t pay any of your credit card bills for over 90 days, your credit report will become full of the dreaded “90 day lates.” This totally trashes your credit score. Some say it is worse than going bankrupt. The credit card companies decide you are a no good bum. They are pretty sure they are never going to see their money again. Then, if you offer to settle your debt with them, even for way less than you owe, they might just take you up on the deal.
After all, some money is better than no money.

This is where the DRC is supposed to step up and take all those payments you have been sending them (minus fees of course) and negotiate for you to settle your credit card debts “for pennies on the dollar”. But many people find out at this time that the DRC has taken their money and left town. So now you have even less money to pay the credit card companies and your credit rating will take years to recover.

So now you know the secret. If you are becoming overwhelmed with credit card debt there are better ways to handle it. Contact the Association of Independent Consumer Credit Counseling Agencies. They will set you up with a legitimate credit counseling service in your area where you will learn money management skills and work out a payment plan that won’t leave your creditors hating you. You might even get a lower interest rate, and sometimes some forgiveness on your credit card debt.