The reason it’s so bad is because it’s what’s called variable debt. Other debts like a mortgage or auto loan are fixed debts. They have one payment a month and a fixed term, so you’d know exactly when you’ll have the debt paid off. For example, auto loans typically have terms of five, six, or seven years. Personal loans typically have a term of three or five years.
That old demon called compounding
Fixed debts also have fixed interest rates. As an example of this, the interest rate on a personal loan can be as low as 5.99%, though most come with higher rates. The interest rates on a 30-year mortgage are still near all-time lows. In addition, the interest on these loans is built into their monthly payments. When you make your last payment on one of these loans, that’s it. You owe nothing more.
Unfortunately, it’s different with credit card debts. While they do have fixed interest rates, your debts are compounded each month. Let’s suppose you owe $1000 on a credit card at 15% interest. At the end of the first month, when interest charges are applied, your balance will then be $1013, and so on. It gets even worse if you owe $5000 on a credit card with an APR of 16%. If this is the case and you make just the minimum payment of $125 a month, it would take you 4.8 years to pay off your balance and would cost you $2000 in interest.
Tip #1: Avoid credit card debt
The best thing you can do with credit card debt is avoid it like Ebola. If you have more than one credit card, choose the one with the lowest interest rate, and then freeze the rest in a block of ice. That way you won’t be tempted to use them. You can use the remaining one, but never charge more than you can pay off when you get your statement. This offers two benefits. The first is the obvious, which is that you won’t be running up debt. The second is if you use that credit card sensibly, you’ll have a record of your spending that you could use in budgeting.
Tip #2: Negotiate with your credit card providers
If you’ve run up a serious amount of debt on several credit cards, contact your card issuers and negotiate with them. One of the upsides of credit card debt is that it’s unsecured debt. Almost all unsecured debts can be negotiated, and credit card debts are no exception.
Four things can usually be negotiated with credit card companies. The first is your interest rates. If you have credit card debt at 19%, you might be able to negotiate it down to, say, 13%, which would mean lower monthly payments. The second thing that can usually be negotiated is to have your payments waived for a few months. This would give you time to get your balances under control or to catch up on your payments.
Third, you could negotiate to have your credit card debt converted into a fixed, monthly loan. While you wouldn’t be able to use the card anymore, you’d at least know what your monthly payment will be each month, and when you will have the debt completely paid off.
The fourth thing that you might be able to negotiate is your balance. This is the hardest by far because you need to be experiencing a serious financial emergency to get the credit card company to agree. This could be that you’ve lost your job, just went through a divorce where you were stuck with almost all the debt, or were hit with huge medical bills. And you may be required to provide documentation that proves your emergency.
Tip #3: Settle your debts
A secret that credit card companies would rather you didn’t know is It’s possible to negotiate settlements. Let’s suppose you owe that $5000 we mentioned earlier. You could contact the credit card issuer and offer to make a lump sum payment of maybe $1500 to settle the debt. Your offer probably won’t be accepted but with a little back-and-forth you might be able to settle it for $2500. Of course, you would need to have the money available to immediately send the credit card company.
If you’re struggling with credit card debt to the point where you’re several months behind, take heart. You do have alternatives that could help you better manage or even pay it off in a reasonable amount of time. The important thing is to choose a strategy and start contacting your credit card companies.