Can't afford monthly card payment? Try these options
By Susan Keating | Published: October 29, 2016
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
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 debt, If you settle debt, expect a credit score drop
Meet CreditCards.com's reader Q&A expertsDoes a personal finance problem have you worried? Monday through Saturday, CreditCards.com's Q&A experts answer questions from readers. Ask a question, or click on any expert to see their previous answers.
- Use 0-percent promotions to create an emergency savings account – Don't rush to pay off card debt that won't incur interest for a while; make calculated monthly payments and use your cash to give your financial health a boost instead ...
- How far can I go over my credit limit before my card gets declined? – There's no magic formula to guess when a transaction on a maxed-out card will go through, but if it does, it may impact credit limit, monthly minimum payments and/or even credit score ...
- Is paying off card debt with a personal loan a good idea? – The option of taking out a personal loan to pay off credit debt can work for some consumers, but much will depend on credit score, amount of debt, and spending habits ...