Whether this is good or bad it’s a fact that Americans must love debt because they have so much of it. In fact, American families are now carrying an average of $15,799 just in credit card debt, which helps explain why median household debt in the US has risen to $75,600. One out of every seven Americans has at least 10 credit cards and 43% of US families actually spend more than they earn.
Do you feel as if you were in a sinking ship?
If you’re carrying more than $15,000 in credit card debts and the average of $75,600 in total debts you may feel as if you were aboard a sinking ship. Fortunately, there are things you could do to get rid of those debts and live debt free. It may not be easy but the end result – living debt-free – would make it all worthwhile.
#1: Consolidate your debts
If you do have multiple credit cards a good first step is to consolidate them into just one. This can make it much easier to manage what you owe. Of course, it’s best to transfer those credit card debts to one with a lower rate. There are now numerous 0% interest balance transfer cards available. If you were to qualify for one of these cards you could have as many as 18 months interest free during which time you could be paying down or even paying off your balance owed. You could also consolidate any student loan debts into a Federal Direct Consolidation loan (except Parent PLUS loans). You would then have a new interest rate, which would be higher than the lowest interest rate you’re currently paying but lower than the highest. Plus, these loans come with a variety of repayment options. One example of these is Pay As You Earn where your monthly payments would be capped at just 10% of your discretionary income.
#2: Don’t be afraid to negotiate
Have you ever thought of calling your credit card companies to negotiate better interest rates? If you’re typical the answer is probably “no.” But the fact is you should be able to negotiate a better interest rate if you can prove you’re experiencing a financial hardship. We saw where one person was able to negotiate a reduction in his interest rate from 16% to 7% on a card that had a balance of $4900. If you’re a really good negotiator you might even be able to negotiate a sort of timeout of three or four months when you wouldn’t have to make any payments at all – to get back on your feet. You might also be able to negotiate a settlement where you would make a lump sum payment of less than you owed and, in turn, the lender would forgive your remaining balance.
#3: Prioritize your payments
If you find that you’re unable to pay all of your debts each month you will need to prioritize and focus on keeping current on debt obligations that are secured such as your mortgage and auto loan(s). You should also give high priority to those of your debts that are tied to your necessities such as utilities as well as any debts that can’t be discharged through bankruptcy. You will also need to make a plan for dealing with your unsecured credit-card debts. In one study Consumer Reports Money Lab found that paying off the card with the highest interest rate first meant paying the smallest amount of interest. However, if you owe a lot you won’t feel much in the way of results as quickly as if you were to use the “snowball method.” This is where you work first on paying off the card with the smallest balance while continuing to make the minimum payments on those cards with the larger balances. Get that first card paid off and you will then have additional money available to begin paying off the card with the second smallest balance and so on.
#4: Get a credit counselor
You might actually be in too deep to help yourself. If this is the case you will need to find a nonprofit credit-counseling agency for help. Do this and you will be assigned a credit counselor that will help you develop a debt management plan (DMP). Your counselor will negotiate with your creditors to get your interest rates reduced and to eliminate late fees and other penalties. The agency will then act as a consolidator and will collect one monthly payment from you and then disperse the money to your creditors. The best nonprofit agencies are members of the National Foundation for Credit Counseling. They normally charge a one-time setup fee of about $30. There is also usually a monthly maintenance fee of around $20. But don’t choose a credit-counseling agency until you’ve researched it with your local Better Business Bureau.
#5: Avoid temptation
It’s important to know your “buying triggers.” For example, do you have the habit of spending Saturday mornings on the Internet shopping? Or maybe you just can’t pass that fashion boutique without stopping in for a look. You can keep from running up more debts by physically separating yourself from those things that tempt you. Instead of spending Saturday morning shopping on the Internet try taking a brisk walk followed by a good workout. The important thing is to avoid those things that lead to spending.
#6: Consider choosing the “nuclear option”
Your last resort is the “nuclear option” of filing for bankruptcy. While this would have a severely negative impact on your credit score it is a way to get rid of your unsecured debts. General Motors can file for bankruptcy and so can you. Whether you choose a Chapter 7 or Chapter 13 bankruptcy, you will be able to keep your home and your car but will lose your unsecured debts. In the case of a chapter 13 your credit card balances would revert to zero. However, you will still owe on your secured debts such as your first mortgage, auto loans and student loan debts. If you choose a chapter 7 bankruptcy you will be required to liquidate your assets to pay off your debts. But most of your assets such as your home, furniture and personal possessions are protected so you might end up not having to liquidate anything.