Practical strategies for debt relief
If there’s any one item that will suck the life right out of your bank account, shred your budget, and seriously damage your long-term savings goals, it’s debt. And the worst kind of debt is credit card debt.
With annual rates of 20% or more, they’ll bleed you dry unless you take preventive action right now. So pay off that credit card debt as fast as possible. If you’re in deep, consider consolidating your debt with a low-interest line of credit or a personal loan. And then cut up all your cards, save for one. And on that one, slash the allowable credit limit to the bare minimum – and never max out the card!
Paying off large credit card balances that you’ve carelessly run up, especially over the holiday spending extravaganza, might at first seem an insurmountable task. But after you’ve put the brakes on your bad borrowing habits, and freed up some extra funds for the month, there are six tried-and-true tactics you can use to start chipping away at the debt mountain.
1. Make the minimum payment
Start paying the minimum monthly payment on each card. Add an additional amount beyond the minimum to at least one card with the highest interest rate.
2. Consider a zero-interest transfer
Consider transferring a high card balance to one of the zero-interest transfer promotions that start appearing in your mailbox at this time of the year. You could get breathing room of as much as six months with no interest. Any payments you make would go directly against your principal amount. But if you go this route, be sure to check terms and conditions after the interest-free period expires.
Remember, too, that applying for a new credit card, especially if you already have wallet slots full of the things, will affect your credit score. If you suspect you’re in this situation, consult a qualified financial planner, typically one with a professional accreditation, such as a Certified Financial Planner (this is different from a “credit counsellor” – see more below).
3. Pay a fee, switch rates
Talk to your credit card company (often your bank) to see whether you are eligible for a premium card. You’ll pay an annual fee, but the interest rate charged on these cards can be less than half that charged on no-fee cards. If you have large outstanding balances, what you spend on the annual fee (anywhere from $99 to $150 or more per year) will be offset by savings you’ll gain on the monthly compounded interest payments.
4. Line of credit if you can
This is a tricky one. If you already have a personal line of credit, and if you haven’t maxed that out too, you might consider paying down some of your credit card balance using your line of credit. Interest rates are considerably lower on lines of credit, so you’d be reducing the overall interest rate hit. On the other hand, if it’s a secured home-equity line of credit, you in effect have a second mortgage on your home. If you don’t pay that as stipulated, the bank can seize your home. If it’s an unsecured line of credit, it’s in effect a callable loan – and that bank can demand payment in full at any time, especially if you start missing minimum payments. Use personal lines of credit sparingly.
5. Loan consolidation
Another tactic is to speak to your bank about a loan consolidation. In other words, take out a personal loan at a lower interest rate to pay off other higher-interest credit-card loans. Your bank’s loan officer can work out a payment schedule to fit your budget. But as I mentioned above, you’ll have to make a promise to yourself to cut up or lock away all but one (preferably low-interest) credit card until that personal loan is paid off.
6. Get the right kind of help
Finally, be skeptical of so-called “credit counselling services,” especially of the strip-mall, store-front variety. You may end up in an even worse debt crunch than before. If you’re concerned about credit card debt problems, talk to your bank first or consult with an accredited, fee-for-service financial planner or advisor.
Getting into a credit card crunch is easy – getting out is difficult and often financially painful. Above all, avoid declaring personal bankruptcy, even though this might appear to be the “easy” way out. (It’s not a coincidence that bankruptcy trustees ramp up advertising in the post-holiday period.) Bankruptcy is a legal morass and will impede your ability to borrow and conduct your other personal financial and business affairs, including investing, for years to come.
So make every effort to fix your credit card crunch using the tactics I’ve outlined here. It takes persistence and fiscal discipline, but it can be done.
© 2015 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited.