Make sure your payments make a dent in your debt

Opening Credits columnist Eric Sandberg
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

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Question for the expert

Dear Opening Credits,
For more than six years, I have been paying loan and credit cards, but still my outstanding balances are the same due to the fees and interest stemming from previously missed payments. I am really sick and tired of this situation. What can I do? How do I get rid of this situation? -- Rudolph 

Answer for the expert Dear Rudolph,
Sending money to creditors but not seeing the balances budge is so distressing and depressing. And trust me, I'm not trying to rub it in, but it's exactly why people should never borrow sums they can't afford to repay within a month or two.

To clarify, I'm referring to unsecured consumer debt. Liabilities that have assets attached to them are different. Not only are they secured by something tangible, but many times the assumption is that the property will eventually increase in value. With balances like those you accumulated on credit cards and personal loans, however, you have nothing but the stuff you bought -- which usually depreciates quickly or has no intrinsic value in the first place. Just try to resell that memory of a cool vacation or delicious meal! I'm not implying that they don't have meaning to you, but you should acquire them with cash, not credit.

OK, so that's the past. Now to move on to a better future ...

You're most likely treading water because the interest rates your lenders are charging are high (especially since you've missed some payments) and you're not sending enough money. So to solve your problem, I see three types of solutions:

  1. Develop a personal repayment plan. Review your budget and determine a fixed sum that you can promise to the creditors on a monthly basis. For example, let's say you owe $10,000 and the average interest rate is 20 percent. If you can make regular payments of at least $250, you'll be in the clear in five and a half years. If you send in $372, you could be out of debt in three years, and it would take just 12 months if you could manage payments of $975. You'll shave off even more time and finance charges if you can persuade your creditors to reduce the interest rates.You can use's payoff calculator to play with the numbers.
  2. Use a credit counseling organization's service. Schedule an appointment with a good agency. (Make sure it is affiliated with the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies.) It's free, and a counselor will review your budget, and talk to you about a debt management plan. Some creditors reduce or even eliminate interest for their clients, and the plan is designed so you'll be debt-free in five years or fewer. There is a small administration fee if you sign up, though the money you save in finance charges would more than make up for it. You can accelerate payoff by sending extra funds at any time, too. 
  3. Chapters 7 or 13 bankruptcy. A Chapter 7 bankruptcy allows you to discharge unsecured debts while a Chapter 13 lets you reorganize your liabilities so you can pay a portion of what you owe -- and possibly discharge the remaining unsecured balances. Both can offer a great deal of relief, though they do come with serious downsides, including credit damage. You can lose property in a Chapter 7 and though you may keep your stuff in a Chapter 13, it's quite restrictive and the trustees who would handle the case are expensive.

I strongly suggest pursuing repaying the accounts in full with the first or second options before jumping straight to the legal way out. This way, you'll start to re-establish a steady payment history, which will help your reputation with lenders in the future. Equally important is that when you do start to see your balances go down, you won't feel sick and tired anymore.

See related: Is bankruptcy right for you? Our 7-point checklist will tell you

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Updated: 11-23-2017