Payment options for high-interest debt
A debt management plan can help, but is it your only choice?
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.
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Dear Opening Credits,
I owe $2,000 on my Home
Depot card. I contacted them due to financial
hardship. The interest rate is over 26 percent. I
asked if they would close my account and lower the interest rate so I
could have a plan to pay it off. I
don't have any late payments. They
said they don't deal with individuals --
that I have to
use a consumer counseling agency. They charge $50 a month. Do I
have any options?
Sometimes a credit counseling agency's
debt management plan (DMP) is the right move; other times it isn't. Before
discounting it, though, book an appointment at a reputable credit counseling
agency (affiliated with either the National Foundation for Credit Counseling or
the Association of Independent Consumer Credit Counseling Agencies) and find
out. The sessions are free and can be quite illuminating. In an hour or so, the
counselor will review your financial situation in detail and propose several
reasonable ways in which you can resolve your problems.
One of the options the counselor may
present is that debt management plan. These arrangements allow you to make payments to the
agency, which they then disburse to the accounts on the plan. Many of the
participating creditors lower their interest rates only for people on the plan --
but not, as you found out, for cardholders directly. While it's true that the
agencies add a monthly administration fee (and some even charge to set it up as
well), in certain hardship cases, those fees may be waived.
Speaking of interest rates, I gather
your main concern is the one on that Home Depot card. Understandably so; it's
high. To find out what the annual percentage rate (APR) one of these organizations can offer you
instead, I put a call in to my old haunt, Consumer Credit Counseling Service of
San Francisco. Rate reductions are negotiated on a national scale, so they should
be the same no matter which office you go through. And what did I find? That
they may be able to get it down to 9.9 percent -- less than half of what you're
currently being charged.
However, I'm not convinced that a DMP
is best for you, even with a slashed interest rate. If this is your only liability
and your situation is temporary, I'd say that it probably isn't. You see, while
you're on the plan, you'd have to close the account. It sounds like you're open
to that, but if it's one you've had for years and have a decent payment history
with, doing so could lower your credit score. This is not to say that
preserving a score trumps money saved, but it is a consideration.
Also, your debt is pretty low. I know
that the $2,000 balance feels overwhelming, but if you break it down to
affordable fixed payments (which is what you'd have to do on a credit
counseling agencies plan anyway), you may find that you'll be in the black
faster than you think. For example, if you can manage $135 every month, you'll
be debt-free in a year and a half. Plug the numbers into a good online calculator and see what's manageable.
In the mean time, you may still be able
to get that interest rate down, enabling the maximum amount of your payment to
go toward the principal. If you have a credit card with a lower APR and plenty
of charging room (if the new balance would get you close to the limit, forget
it), a balance transfer is worth exploring. You'll have to pay a transfer fee,
but it still could work to your financial advantage. Again, you can do the math
using an online calculator.
What else can you do? Take stock of
what you own, and if you have anything you can part with, sell it and apply the
proceeds to the balance. The less you owe, the less you'll pay in interest --
no matter what rate the creditor is assessing.
See related: The pros and cons of debt management plans, Balance transfers impact your credit score, Is a balance transfer credit card right for you?
Erica Sandberg's articles and insight are featured in such publications as the Wall Street Journal, Pregnancy, Babytalk, Redbook, Bank Investment Consultant, Prosper.com, MSNMoney.com, and Smartmoney.com. An active television and radio commentator, Erica is the credit and money management expert for San Francisco’s KRON-TV, a frequent guest on Forbes Video Network, Fox Business News, Businessweek-TV, and all Bay Area networks. Prior to launching her own reporting and consulting business, she was affiliated with Consumer Credit Counseling Services of San Francisco where she counseled individuals, conducted educational workshops, and led the media relations department. Erica is a member of the Society of American Business Editors and Writers, and on the advisory committee for Project Money.
Send your question to Erica.
Published: June 15, 2011
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