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Can't afford monthly card payment? Try these options

By

Credit Smart
Credit Smart columnist Susan C. Keating
Susan C. Keating is the president and chief executive officer of the National Foundation for Credit Counseling. Prior to joining the NFCC, Keating spent 29 years in financial services. She was the highest ranking female CEO of a U.S. bank holding company, serving as president and chief executive of Allfirst Financial Inc., the largest U.S. holding of AIB Group. She currently serves on Bank of America's National Consumer Advisory Council and is a board member of the Council on Accreditation. Keating also participates in the Financial Regulation Reform Collaborative, a nonpartisan group committed to finding solutions for reforming financial services regulation.

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Question

Dear Credit Smart,
I have a $20,000 credit card debt. My monthly payments are almost $600 per month. It is getting very expensive and difficult to pay. Is there any advice you could give me to lower my debt? I'm overwhelmed by how much I owe and don't know what to do. – Lou

Answer

Dear Lou,
I do understand how a monthly obligation of $600 a month is fairly overwhelming. I checked out the CreditCards.com credit card payoff calculator to see what that would tell me about your debt. I don’t know what your interest rate is, but based on your monthly payment I guessed around 20 percent. Assuming no new charges, the calculator said it would take you about four years to pay off the debt if you continue to pay $600 every month.

The options to handle your debt are to continue to pay on your own (can you take on extra work or sell something of value?), to borrow from a bank or credit union, to borrow from your 401(k) (if you have one) or against the equity in your home, enroll in a debt management plan, negotiate a settlement with your credit card company, or file for bankruptcy. You could also transfer some or all of the debt to a 0 percent APR balance transfer card, but there is typically a 3 percent fee and the 0 percent deal only lasts for a limited time. Of those options, only debt settlement or bankruptcy offers the possibility of actually reducing your debt, but both will seriously affect your credit score in a negative way. As for debt settlement, you will also face tax consequences for any amount that is forgiven.

If you decide you want to try debt settlement, I would certainly advise you to consider negotiating directly with your creditor and not work with a third party debt settlement company.  These types of programs usually offer lower monthly payments, but those payments are kept by the company until they have enough to actually offer a settlement. This means that even though you are making monthly payments, your creditor is not being paid, further ruining your credit score.

Bankruptcy exists in this country for good reasons, but should be carefully considered as this is usually a last resort. If you feel that bankruptcy is your best option, you will have to consult an attorney.

Instead of lowering your debt, you might consider an option that could lower your interest rate and possibly your monthly payment. This option is a debt management plan, which is offered by not-for-profit credit counselors like those associated with my company, the National Foundation for Credit Counseling. On a debt management plan, your account will be closed to further charges, but you will continue to make monthly payments to your creditor.

Debt managment plans are designed to get you out of debt in five years or less. This does mean that you might be on the plan longer than if you continue on your own, but a lower monthly payment might give you the breathing room you need to not feel so overwhelmed by your debt.

Remember to always use your credit smarts.

See related: 1099-C surprise: Canceled debt often taxable as income, Struggling homeowner reliant on credit looks at raiding 401(k), Options for getting a handle on a $37,000 debtIf you settle debt, expect a credit score drop

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Published: October 29, 2016


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Updated: 12-03-2016


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