How to Pay Off Major Debt
Debt can feel like an implacable enemy, Clint Eastwood's Man with No Name, stalking you relentlessly. In terms of loans and credit cards, total consumer credit in the USA is now $3.1 trillion. Almost 40% of US households have an ongoing credit card balance, averaging $7,200.
While many seek assistance from credit card consolidation companies, it's still worth educating yourself on debt reduction strategies. In case you're still not convinced, we have some more frightening numbers for you:
$15,762: this is the amount of credit card debt the average US household has.
$2,630: this figure represents the average credit card interest paid by the average US household monthly.
We've probably made our point now, so let's begin to look at what we can individually do to get these kinds of numbers down to a manageable level.
Here are the options, from the best-case scenario to the worst.
Six Ways to Escape from Credit Card Debt
1: Budgeting and Paying Off your Own Debts
Budgeting is a high maintenance strategy requiring willpower and personal sacrifice. It doesn't sound like much fun, but it saves you a significant amount of money.
Sit down, make a list of all your outgoing expenses, construct a reasonable budget, and then start allocating what's left to paying off that debt. You can use a credit card payoff calculator to discover how quickly your debt will be reduced using this method. The very act of seeing it shrink month by month can be highly motivating.
- It's free. You're not paying fees to a consolidation firm or increasing the interest on your current debt.
- You're taking charge personally, and that can feel liberating.
- Paying off debt this way can take a long time.
- You're alone and unsupported in your negotiations.
- Your creditors may garnish part of your wage.
- Depending on the intensity of your dept, your credit card companies can sue for quicker repayment.
2: Balance Transfer
Another strategy is to shift your debt onto a different credit card with a lower interest rate. Some offer rates as low as 0% for up to 18 months.
- No interest will entail a lower monthly bill (for a set period).
- By consolidating your credit cards into one payment, you make the process of debt repayment much simpler.
- The low introductory rate always has an expiration date, and you may end up paying larger monthly sums than you were previously paying.
- Overall, you are taking on more debt.
The time taken to repay will depend on your terms. For example, imagine you are $10,000 in debt, and your monthly payments are $800. At 20% APR, it would take 15 months, and you'd repay $12,000 in total.
At 15% APR, it would take 14 months, and you'd pay back $11,200 altogether. Zero-percent interest would require 13 months, a month more than most 0% balance transfer cards offer.
3: Credit Card Debt Consolidation
Credit card debt consolidation companies amalgamate all your debt, add interest, and let you pay it off over a longer period with smaller monthly repayments. You must ensure the interest added is acceptable, as is the total time for repayment.
- You have one payment to make each month.
- Monthly payments should be lower, improving your situation.
- You'll probably end up repaying more money overall by the end of the payment term.
- You can lose any assets you use to secure the loan (including your house) if you default on payments.
Time to repay varies. Debt consolidation loans generally offer terms between 36 to 60 months.
4: Home Equity/Line of Credit:
This strategy is essentially a second mortgage. The value of your home becomes collateral for a fixed-term loan. Alternatively, a Home Equity Line of Credit (HELOC) provides you with an account you can draw upon as the occasion requires.
- Generally lower interest rates than credit cards.
- Like consolidation loans, you end up with just one monthly payment.
- With a HELOC, you can be flexible in how much you withdraw and when.
- Beware hidden costs, including appraisal fees, attorney fees, title search, and others.
- You'll only qualify with a good debt-to-income ratio.
- Potential home foreclosed should you miss enough payments.
- With an adjustable interest rate, you are vulnerable to market fluctuations, meaning your interest rate could rise to credit card levels.
* Potential home foreclosed should you miss enough payments.
Time to repay: HELOC withdrawal periods are 5-10 years. Repayment is between 10 and 20 years. You can take out a home equity loan for up to 30 years.
5: Debt Management Program:
On a DMP, you work with a non-profit debt counseling agency, which will negotiate better repayment terms with your creditors. Non-profit debt counseling agencies can include both credit card lenders and loan providers. It may come with services, including budgeting assistance and credit counseling. Once all terms are negotiated, you'll end up with just one monthly payment to the agency.
- Lower interest rates and one simple monthly payment.
- A thorough examination of your finances with expert assistance may help you become better at dealing with debt in the future.
- If you miss a payment, creditors can cancel your DMP agreement and reinstate previous credit terms.
- Your credit rating may be adversely affected by being on a DMP.
Repayment Period: Most DMPs last between 36 and 60 months.
6: Debt Settlement:
This is the most drastic step (the "worst scenario") and should not be taken lightly!
You stop paying your credit card bills. A third-party debt collection firm will attempt to negotiate a reduced settlement for you with creditors. You will pay the company that amount, and it will distribute the money fairly between creditors.
- Debt can be significantly reduced by anything up to 50%.
- Again, one simple payment per month.
- Taxes remain payable on the forgiven debt.
- Debt settlement has a questionable reputation since the companies involved make big bucks by taking a generous slice of your repayment.
- Debt settlement won't pay off your debt quicker. You may have to pay the collection firm for many months before they begin to negotiate with your creditors.
- Accounts are 3-4 months in arrears before creditors will negotiate reductions. Meanwhile, late fees accrue, and your credit score plummets. Debt settlement shows on your credit score for seven years.
- Creditors may simply refuse reduced payments. If this happens, you'll be in a worse financial situation than before you started.
Repayment terms are typically two to four years.
The Best Solution: Self Control
The best long-term strategy for credit card debt is, of course, to get into good habits. We all must stop seeing little plastic rectangles as magic wands to allow us to endlessly spend when we don't have the resources to back up our profligacy. The paradox at the heart of credit is that those who can use it safely are those who least need to.
By getting a grip on your credit card debt, you're making a major step towards financial health and wellbeing, as well as the peace of mind that comes from debt relief.
Financial Hardship Relief
Some of us struggle more than others, and for a good reason. If you've recently lost a spouse, been made redundant, or are suffering in retirement, there are programs you can apply to for government assistance. You should never be too proud to access these programs. After all, that's what your federal tax dollars are for.
Assistance is available for:
- Widows and Widowers: social security benefits, as well as debt relief from your creditors or mortgage provider, may be available.
- Senior Citizens: Almost 25% of US senior citizens have no personal savings at a time when levels of personal debt are skyrocketing. Fortunately, help is available in legal advice, housing assistance, food programs, credit card debt relief, and employment assistance.
- Families in Poverty. SNAP (the supplemental nutrition assistance program) provides food stamps worth between $100 - $900 per month, dependent on family size.Veterans – Housing grants and emergency financial assistance programs are available. Check out the various options here. Survivors assistance programs can help too.
Not All Debt is Bad
Remember that not all debt is considered detrimental. Mortgages, for instance, are considered "good debt," particularly at times of low-interest rates. They are collateralized and show your ability to make regular repayments, which can improve your credit score.
Your credit score can also be repaired with the right debt mix. In fact, your FICO score considers whether you are responsible across a range of credit sources.
The solution may not be to get the scissors out and cut up all those cards but to develop a new and more responsible relationship with credit cards so that credit becomes your friend rather than an implacable foe.