Discover Which Credit Card Debt Solution is Right For You
Saturday, May 8th, 2010If you’re mired deep in credit card debt, you know you’re in a no-win financial situation. It seems that the faster you dig, the faster they keep shoveling more debt right back on top of you. Are you aware that if you owe over $20,000 in high interest credit card debt, it could take you half a lifetime to get out from under it? It’s true, and many people owe far more than that.
The recent credit card reform legislation that was enacted in 2009 has made things a bit better for consumers, but it can still cost you more in interest than the original amount you borrowed on your card. Think about this one for just a minute. If you have $20,000 in credit card debt at 22% interest and you make the minimum payment, it will take you years to pay it off, even with the increase in minimum payments mandated by the new laws.
How many years will it take? 5? Not even, think a bit more long term. How about 10 years? No, you are on the right track, but it will take longer than that until your debt is paid in full. Most credit card companies have a minimum monthly payment of 4% of your outstanding balance. That means that when you start paying on your $20,000 card your payments will be $800 a month!
Even with those hefty payments, if you pay the minimum payment, which will be lower as your loan balance decreases, it will take you almost 18 years to pay off your credit card, and cost you about $37,000! If you kept paying the initial $800 minimum, it would only take you about 34 months until you were debt free.
That is serious. What you need is a solution to your debt woes, so you can get out of debt. Life can return to the good, old days. There is one caution however. You must first find and fix the situation that caused you to get so far into debt in the first place. Was it a single, unexpected event, such as a natural disaster, or medical emergency? A common cause is a spending pattern where you consistently spend more than you make. This could be due to travel, shopping, gambling, or going out on the town. It is imperitive that you correct the cause of your over spending. If you fail to do that, any debt solution will be only a short term fix. You could actually end up far worse off financially than if you did nothing.
Debt Consolidation Loan – This used to be one of the most popular options for credit card debt relief. One of the reasons that credit cards take so long to pay off is because their interest rates are very high compared to other credit such as home mortgage or auto loan. That is because those 2 are secured loans, meaning the lender has some collateral they can use to offset their loss in the event you default on the loan. Their risk is comparatively low compared to credit cards, which are unsecured credit. Unsecured means there is no collateral against your debt, so if you default, the lender gets naught, nada, zip.
It makes sense that the lender would want a higher interest rate for unsecured credit than they would for secured credit because they have lower risk exposure. They are compensated for the higher risk by raising the card’s interest above the standard 5 – 8% rate for a mortgage or auto loan up to 15 – 25% that is ballpark for credit cards.
A debt consolidation loan merely converts your unsecured debt to secured debt, so the lender faces less risk and can charge you a much lower interest rate. Typically the collateral used is the equity in your home or other real estate which you may own. You pledge that as collateral and the lender pays off your credit card balance. They give you a loan for the amount at a lower interest rate. You replace one or more high interest loans with a single, low interest one. This will lower you payment considerably, and can allow you to pay off your debt much faster.
The down side to this is that, because you home is the collateral, if you can’t make the payments, the lender will foreclose on your home and sell it to pay off your debt. You’ll get what ever proceeds remain from the sale after the debt is satisfied and whatever fees associated with the foreclosure and sale are paid for. It is usually not much.
Now that so many people have zero equity or are underwater on their mortgages, the debt consolidation loan is not as common. Normally, a debt consolidation loan will not substantially affect your credit score one way or the other.
Debt Workout – This is a negotiated settlement directly with your creditors. They will normally only offer this if they fear you may declare bankruptcy. Although this is more difficulty since the bankruptcy reform legislation was passed in 2005, it can still allow you to avoid paying back a substantial part of your debt. The lender knows this, so they are motivated to settle for a reduced amount, a lower interest rate, or both. They know that if you do declare bankruptcy, they’ll get much less, or nothing at all. This will negatively affect your credit score, although not to the extent that a bankruptcy will.
Debt Settlement – This is a great option for those with over $10,000 in unsecured debt, in part thanks to the Obama Administration’s stimulus program. Some of those dollars are finding their way to financial institutions to compensate them for taking a loss on their unsecured debts. This is a great thing for you if you fit this description. Your relief can be subsidized by the federal government, allowing debt solution companies to make deals they would have never made in years past.
When you pursue debt settlement, you work with a debt settlement company to negotiate with the credit card company and other lenders you may have. You will pay the settlement company a fee for their services. Be sure you are aware of all the associated fees and charges before you sign any agreement. Be aware that although the company’s terms can be tremendously beneficial to you, in some cases you can suffer substantial losses if you fail to follow the terms of your agreement.
Is there government money just sitting there to help me and others who are in debt?
There is a misconception that there is a large pool of dollars out there earmarked for consumers with debt problems. This is not the case, although the money does benefit consumers. It is genuinely provided to banks and other financial institutions to help keep them viable in the case of large numbers of bad loans or other debt. The stimulus money allows lenders to be more flexible with their settlement cases, so that the money does indirectly benefit you if you are seeking to work with your lender.
Will this kind of negotiation affect my credit?
Not enough people ask this question. Weather they are unaware about the credit implications, or are not in a position where they can do anything about it, it is a key part of choosing the proper solution. Unfortunately for you, yes, it will lower your credit score, but that may be a small price to pay for ultimately avoiding around half of your outstanding credit card debt, virtually over night There will be time to repair bad credit later. The fact is that many people never pay off such large debts, and simply default when times are tough. Another option is that they struggle along for decades, spending tens or hundreds of thousands of dollars in interest payments that they get utterly nothing for. Many people in this situation feel that if their choice is a roof over their heads or defaulting on their credit card bills, they will choose the latter.
These are just some of your options if you are in serious credit card debt, and sinking lower every month. You may feel that there is no way out, but there may be a real way to fix your financial problems. In fact, there is a good chance that you can find a solution to your problems that does not involve bankruptcy, which will follow you around for 10 years. It’s good to know that you can legally eliminate credit card debt, and may not have to be buried forever.
