How to Get Out of Credit Card Debt

How to Get Out of Credit Card Debt

posted in: Mind | 0

 

It’s now the first week of a new year and hopefully we have all had an enjoyable and intimate Christmas holidays. However, it’s also the time of year when many people feel the pinch of credit card debt. There is so much pressure to buy, buy, buy leading up to Christmas, that a great many people gain thousands of dollars in debt. But it’s not Christmas which is the real problem, rather many people are living a debt based lifestyle in the first place, so a foundation of debt is already there; but with the Christmas buying frenzy, the credit card debt often goes out of control and January is the time of the year, which should be filled with new opportunities, but instead its filled with the stress of debt repayment!

 

Obviously we have to pay of our credit card debts, but in many cases credit card debt goes out of control over time. At one time a person owes $10,000, by the next year they owe $20,000 and five years later they find themselves owing $70,000 and having trouble juggling credit card minimum payments, as $70,000 credit card debt results in a minimum payment of 2% of the balance, they will end up paying out $1400 a month simply to stand still, for at 18% interest it would take 7 years to pay off this debt and this is only if you do not add in new charges!

 

Of course this is ridiculous as everyone adds new debt to their credit card!

 

So credit card debt is designed to have double digit interest rates combined with low monthly repayments, which are designed to keep you in debt forever!

 

For some people they have low level debt, which over time wastes a lot of money but still they can get by. While for others credit card debt can be crippling. And of course for a great many people credit card debt is simply an extension of the many other debts which they have accrued, such as home loans, car loans, short term loans, EMI payments on home appliances etc. Anyway, whichever way you look at it’s about time that you nip it in the bud!

 

In this site we cover a lot of varied material and this is because we are aiming at integration of body, mind and soul and part of this integration requires material wellbeing, as external stresses such as large scale personal debts, will result in stress which will weaken your health, stress your mind and distress your spirit, so why not take some practical steps towards leading a more balanced lifestyle!

 

When we think about balancing our body, mind and spirit, one of the easiest steps to take is to take your financial wellbeing and make it better, for a life with little or no debt is a fairly stress free little and de-stress is the way forward, it’s the way towards making progress in your life!

 

Popular Credit Card Debt Strategies

 

Budgeting:                                                                                                                                               Budgeting is the most famous method of paying of credit card debt and consists of paying off one card, while maintaining minimum payments on the other cards and then “snowballing” onto the next card and so on. For example, say you have 3 cards (with $15000 at 18% interest) and owe $5,000 on each and that your minimum payments are $100 a month. So for 2 cards you pay the $100, but for one cards you pay off say $500 month. So you are only expending an extra $400 a month, but you end up paying this debt off in just 11 months, then you move on and pay minimum payment on just one card, but so you snowball the $100 saved and add it to $500 and so you pay of $600 a month and pay of card two in 9 months. Then you roll over the one again, so now you pay off $700 on the third card and so you pay it off in 8 months. So now you have paid of $15000 in 28 months!

 

Now this works well for a small debt and if you have a smallish debt, then this is the way to go. It can be confusing and tempting to make sporadic attempts at paying of credit card debt. But snowballing is the best way to pay off such debts. So in essence pay of minimum payments on all but one card; pay off more on that card and after you pay if off, roll over or snowball the payment until the next card and so on, this is the quickest and most effective way to clear of regular credit card debt.

 

However, if you have a big debt such as $60,000, then snowballing won’t work. For example if you have 3 cards with 20,000 per card and you pay off $400 per card, save one which you pay off $1000 a month, it will still take 24 months to pay off the first card and you still have to pay off the other 2 cards, so at this rate it will still take the best part of 5 years to pay of these cards!….And this is all based on never making any new purchases!

 

When the amount becomes bigger a better approach is required and this leads us onto credit card debt reduction!

 

 

Credit Card Debt Reduction:                                                                                                      Credit card reduction takes place when you approach your creditors and ask them to reduce the interest on your debts. Although you can do this personally, more often than not most people approach a debt reduction agency, whereby they approach the creditors for you. Atypically the debt reduction agency will ask you to hold off making payments until they negotiate with your creditors. The creditors will naturally send out a notice demanding repayment, at this stage the debt reduction agency approaches the creditor and explains that if they want their money that they will either have to reduce the interest rates or the total amount due.

 

Pretty much in most cases the creditor will accept a reduction in either interest rates or the principle to be repaid. How much of a reduction will depend upon how good a negotiator your debt reception agency agent is, which is pretty hard to judge, you just have to shop around approach a few debt reduction agencies and then pick one and see how it goes.

 

For anyone with a high amount of debt reduction, it is a great idea, because a debt such as $70,000 which is costing $1400 a month just for minimum payments might be readjusted to you still paying in $1400 a month, but now instead of taking 7 years to pay off the debt, it only takes 4 years, or as often is the case the person reduces the monthly repayments to only $700 a month, but now they can still pay this off in 7 years, while they have more breathing room, to make ends meet on a lower monthly payment.

 

Obviously you could go about approaching your creditors yourself and negotiating and this might be a good option, if you are an assertive person, as obviously a debt reduction agency will take a commission and this approach will eliminate the need to pay a commission. However, before you go about and try this make sure that you are assertive and organised and persistent, because the debt reduction agency will have a methodology and also they will often have a working relationship with many of your creditors, so it will probably be easy for them to bring about a sizeable reduction; for you to achieve the same degree of success will probably take considerable negotiating skills which is not everyone’s forte. Of course a small reduction will probably be made to just about anyone who looks for a reduction, but a sizeable reduction may be more difficult to attain.

 

Are there any own sides to credit card debt reduction?

 

Well there are two potential downsides. The first is that the creditor might not accept the terms of the negotiation and they might look for interest on the missed payments and threaten legal action, which means that you now owe them the original debt, plus the missed payments plus interest on the missed payments. Secondly way too many people seek credit card debt reduction, or indeed a debt reduction on all debts, only to amass debt all over again. The first key to reducing your debts is to get your budgeting right in the first place. You have to learn how to live within your means in the first place, whereas if you stay in denial, then obviously debt will accrue and for many people, they spend their entire life’s going around in circles, regarding their debts. If you decide to go for credit card debt reduction, be responsible about it and you will find it to be very effective!

 

Credit Card Debt Settlement:                                                                                                   Credit card debt settlement is one step beyond debt reduction, in that you are looking to reduce the outstanding principle. Sometimes this will even take place with credit card debt reduction, but in this case we are applying it across the board. Once again usually a debt relief agency is sought and similar procedure is followed. However, in the case of debt settlement, often it becomes a waiting game which can stretch out over a year or more, because the debt settlement agency is playing chicken with the creditors to see will they lose their nerve. To get them to reduce the principle, requires a demonstration that something is better than nothing. Say you owe a creditor $100,000, well which is better zero or $50,000? In most cases, after a while creditors will accept a significant reduction in the principle.

 

Credit card debt settlement works out great for people who have no chance of paying off the credit card debt. Say you owe $200,000 in credit card debts, well chances are that unless you have a really big income, that no amount of debt reduction will ever clear your cards. So the only way forward is to get the bet back own to a reasonable level. So you might go from having 5 credit cards at 18% interest and a minimum payment of $4200 a month, down to $100, 00 debts at 14%, bringing your monthly payment down to just $1874 a month!

 

As you can see debt settlement is a great strategy, but once again the same downsides as credit card debt reduction represent but to a more intense degree. Often creditors will take you to court and it’s all too easy to slip back into debt nice more!

 

So who should use credit card debt settlement?

 

The sort of person who should use it is someone who is close to bankruptcy. It’s an aggressive and mentally straining approach because about six months into the process you will be hounded by your creditors. At this stage we should also look at bankruptcy!

 

Bankruptcy:                                                                                                                     Bankruptcy is the final option, as with bankruptcy a trustee is appointed by the court so as to manage the bankruptcy process, which inevitably includes the fire sale of the debtor’s possessions!

 

There are two reasons why people hate bankruptcy and this is because firstly, a lot of possessions are sold off for peanuts, as the trustee wants to finish the process regardless of value. So for exam poke, a car valued at $30,000 will usually go for auction and might get a silly figure such as maybe $10, 00. An estate worth $1000, 000 could easily be sold off for $200,000!

 

You might wonder why this should bother you as you’re not getting the money, but the thing is they won’t stop the bankruptcy process until the debt is either cleared, or they run out of assets So say you owe $500,000 and your assets are worth $1000,000, well the trustee will sell off everything, until this $500,000 is cleared. The house worth $500,000 might go for $200,000, the car worth $30,000 might go for $10,000 etc., and so chances are that you will lose everything!

 

The second downside is that depending upon your country of residence, you will have no credit rating for quite a while, usually around 7 years, depending from country to country and state to state!

 

So what’s the good side of bankruptcy?

 

The good side of bankruptcy is that you are free from debt and hassle. No more creditors knocking on your door and no more vain attempts at clearing the debts. Yes you lose your stuff and you have to go to court and you can’t get a loan for a long time, but what the hell, it’s all over in a few months and you will have no more payments to make!

 

 

Final Thoughts on how to Get Out of Credit Card Debt

 

Ok its new year and you owe some money so what to do about it?

 

Well the first thing is to get your budgeting in order, because none of the strategies noted above will work unless you learn to stop getting into debt, in the first place!

 

Secondly while the strategies noted above work for every kind of debt, the first port of call must be credit cards and any kind of hire purchase, as these have outlandish double digit interest rates and these debts are eating up most of your repayments. Consequently these high level debts have to be settled first. Furthermore, credit card debts are designed in such a way that you’re paying of a tiny amount of the principle initially. So for example, if you pay off a minimum payment at 2%  minimum payment levels, then it takes 7 years to pay the money back, as initially you are only paying off a tiny amount of the principle. A minimum payment of say $100 a month, might see $90 going to the interest and $10 going to pay of the principle. The same approach is used for mortgage repayments. If you say pay $10000 on a mortgage, in year one maybe, only $100 is going to pay off the principle, but by year 20 $900 is used to pay off the principle and $100 is used to pay off the interest.

 

This works out fine in home finance, as the bank wants to protect itself on such a long term loan, but this is ridiculous in a short term loan. Short term loans, such as car loans, for instance, reduce in a proportionate way. Say you owe $30, 00 on a car and you are paying for it over 5 years, well the principle will be reduced by around $6000 a year and as a result of this the overall interest paid is low, as the interest is based upon a reducing principle., For example 10% interest in year one, is 10% of $30,000 and in year two its 10% to $24000 and so on. When the bank works out the final figure, it adds it all up and divided it by the total number of months so as to give a final average. monthly figure which you end up paying. It’s a sensible approach but credit cards are not set up this way.

 

The big problem with credit cards isn’t just that you are paying say 18% of $30,000 this year and 18% of $28000 net year etc., it’s also that credit card tends to be used frequently, so the new debt is added in on top of the old debt and so the principle ends up never been paid. Even if you don’t have a big debt, chances are that you are spending hundreds, possible thousands of dollars a year, on unnecessary credit card interest!

 

Without a doubt debt is badm but credit card debt is totally immoral in the way that finance companions manipulate their customers. There is only one proper way to use a credit card and that’s to clear the balancwe within the 30 to 50 odd day turn around period, meaning clear your debt each month, other than that just stick with a debit card as credit card debt will ruin your finances, if unchecked over the long-term!

 

Finally regarding credit card debt reduction strategies, budgeting is the first stop; credit card debt reduction is useful if debts are out of hand, settlement is useful if the debts are outlandish and bankruptcy is the last stop, if you cannot get things together no matter what you do. So for example a person might have an income of $30,000 a year and a credit card debt/all debts of $10,000, well budgeting will fix this. Another person on 30k a year owes $50, 00 well in this case consider credit card debt reduction and another person on 30k a year has a credit card debt of $100,000, well in this case settlement is probably the only long-term viable option. Finally another person earning 30k owes $300,000, well unless they want to spend the next 70 years paying off debts, bankruptcy is the best option for them!
Ok so if you have any financial problems or know anyone who does, now (early January) is a great time to get started with them. For debt is like a mill stone around your neck and integration of body mind and spirit is very difficult to achieve in such as stressed it state!

 

Wishing you a happy and prosperous and debt free New Year!

 

 

 

 

Dermot

 

 

 

 

Please follow and like us:

Leave a Reply