How to pay $12,000 in credit card debt quicklyUnless you win the lotto, you need a planBy Todd Ossenfort
Dear Credit Guy,
I
have a total of $12,000 in credit card debt (five different accounts). I'm
current on my payments, paying a little more than the minimum payment. I just
feel like it's going to take me forever to pay off the balances on my accounts.
Is there any way I can be debt-free sooner without hurting my credit and
combining all those account balances into one so I can easily make one easy
payment (within my budget) instead of five? I read about debt settlement and
that is not the option I want to go due to the fact that it'll hurt my credit.
Thanks. Hope to hear from you soon.
-- Mey
Dear Mey,
You
are absolutely right that debt settlement will hurt your credit. Not only that,
but settling with your creditors after you are more than 180 days late is something
you can do yourself without the help of a debt settlement company that will
charge you a hefty fee. Saving your credit rating and paying what you owe is a
much smarter route, especially considering creditors are not the only ones
making decisions based on your credit rating. Your insurance company, employer,
future employer and landlord may also be. Plus, any savings you realize from
settling for less than you owe could have income tax implications
.
I
hear your frustration about seemingly taking forever to pay your $12,000 debt.
One thing to keep in mind is that it's likely you did not rack up the debt
quickly and unless you hit the lotto, it won't get paid off quickly. It may,
however, be paid quicker than you think. Right now you are paying "a
little more than the minimum payment." If you continue to make the payments
that you made this month, which for the sake of argument let's say was 3
percent of your balances or $360 plus $40 for a total of $400, you will pay off your balances in 36 months or three years.
Let
me clarify some things -- the pay-off period of three years assumes that you keep
making a $400 payment each month, do not add any purchases to your balances,
your interest rate is a reasonable 12 percent and you won't miss any payments
that may drive up your interest rates. If any of these don't apply, then your
pay-off period will be slightly longer.
Many
people know it will take 10 years or more to pay off their credit card balances
if they are making only minimum payments. What many people don't know is the
key to paying off the debt in a reasonable time frame -- three to five years --
is to continue to make the same monthly payment consistently until the balance
is paid. It only takes much longer when you pay only the minimum due required
by the card issuer. The minimum payment decreases on your statement as your
balance decreases, but if you continue to pay the same consistent monthly
amount without lowering it, paying off the balance will take much less than 10
years.
In
answer to your question regarding making one payment, you could contact a non-profit
credit counseling agency (affiliated with the Association of Independent Consumer Credit Counseling Agencies
or the National Foundation for Credit Counseling) in your area to determine
if a debt management plan (DMP) would be in your best interest. Depending on
your current interest rates, a DMP may save you some money and you would make
one payment to the agency that would then disperse the money to your creditors.
One thing to keep in mind with a DMP is that your accounts are closed and you
no longer have access to them.
You
might also consider setting up automatic payments to your creditors with online
banking. This would ensure that your payments are made on time and you would
only need to set it up the one time and just monitor it to assure everything is
getting paid as you wish.
Take
care of your credit!
See related: Beward of IRS tax bite that may follow canceled debt, 9 tips for job seekers with bad credit, Credit card pay off calculator
Todd Ossenfort is the chief operating officer for Pioneer Credit Counseling in Rapid City, S.D. Pioneer Credit Counseling has been a member of the Association of Independent Consumer Credit Counseling Agencies since 1997.
The Credit Guy answers a question about a debt or credit issue from a CreditCards.com reader each week.
Send your question to The Credit Guy.
Published: November 9, 2009
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