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Debt is something that many Americans are, unfortunately, very familiar with. The U.S. collectively has over $900 billion in credit card debt, which remains one of the most daunting types of debt.
Even though it may not feel like it, there are ways to make it out of the debt cycle. Debt relief options come in the form of credit cards, loans, and tailor-made programs designed to help you not only learn how to get out of debt but why you ended up in a situation that’s so difficult to climb out of.
Here are four worthwhile options to consider when you’re ready to tackle the debt that’s weighing you down.
- Americans have $925 billion in credit card debt, as of the third quarter of 2022. (Federal Reserve Bank of New York)
- Overall credit card balances rose by $38 billion since the second quarter of the year. (Federal Reserve Bank of New York)
- Alaskans have the highest credit card balances, at just over $6,617 per person on average. (Experian)
- Wisconsin comes in with the lowest credit card balances, with residents having an average of $4,329. (Experian)
- The average credit utilization ratio in the U.S. is 25.6%. (Experian)
- As of 2021, Generation X has the highest credit card debt, with the average Gen Xers carrying $7,185 in credit card debt. (Experian)
Talk to your creditors first
It may seem embarrassing to ask for help from the creditor you’re struggling to pay, but they want to get paid, so they may be willing to work out a deal. Muster up the courage, call them, and explain your situation. While you may have to hold firm and not budge when they tell you they can only get your payment so low, eventually, you may be offered a special option.
Hardship programs are simplified repayment plans. To help you pay something, the financial institution may waive fees or temporarily lower your interest rates, and you’ll have to agree to a certain repayment time frame. These are often short-term arrangements, but they can save you hundreds of unnecessary fees if you stick to the payment schedule.
Debt consolidation involves combining all or some of your debts into one monthly payment. You’re effectively taking out another loan, which pays off multiple debts, rolling them all into one monthly payment to the new lender. Ideally, you’ll also get a lower interest rate, making your payments easier to keep up with.
With credit card debt in particular, you can use debt consolidation loans or balance transfer credit cards. Debt consolidation loans offer a lump sum payment that you can use to pay off your debts. You’ll get a regular monthly payment schedule with a certain payoff date, whether that be a year, two years, or five.
Balance transfer credit cards are similar. While it may sound counterintuitive to open another credit card, it’s a similar consolidation tactic. You simply move debt from one or more high-interest cards to a new card with better terms. Most balance transfer cards offer a 0 percent intro APR, allowing you to focus on paying down you balance without interest adding to it. You’ll get this APR for a predetermined time, usually around 12-18 months. If you can pay off your debt during this 0 percent APR period, you’ll be able to pay off your remaining debt, interest-free.
|Pros of debt consolidation||Cons of debt consolidation|
|Pay a lower interest rate or reduced fees.||You may not get approved for a high enough amount to pay off all your debts.|
|Make one payment that encompasses all your debt.||You’re committing to a multi-year loan or credit card, which can be difficult to keep up for those with fluctuating incomes or financial situations.|
|Potentially boost your credit with on-time monthly payments.||Closing or having restricted access to your credit card accounts during the program may be a difficult adjustment.|
|Choose from a variety of balance transfer card and debt consolidation loan options.||Debt consolidation options are only available for unsecured debts – you’ll have to manage any outstanding secured debts on your own.|
There are nonprofits dedicated to helping those who can’t handle their debt. For those who qualify and are willing to stick to the process, these nonprofits are the best way to pay off credit card debt. These credit counseling companies are educational resources that are there to help you understand how you got into debt, how to get out of it, and how to stay out of it. Additionally, the counselor(s) you work with may work with your creditor(s) directly to help settle your debt and create a payment plan that works for you.
You can find credit counseling through the National Foundation for Credit Counseling. You should stick to nonprofit agencies, as for-profits may have expensive fees and may not be reputable. Nonprofits are generally free to work with, but some may charge small fees to fund their negotiations with your creditors.
|Pros of debt settlement||Cons of debt settlement|
|You could wind up paying less than your total debt.||Some counselors won’t be able to negotiate your debt with creditors, as many banks have zero tolerance for settling debts.|
|You can work with one nonprofit counselor, rather than multiple creditors.||Negative impact on your credit score from missed payments to creditors during negotiations. You will likely also face late fees and increased interest rates.|
|There are fewer fees than other debt relief options.||There will be fees to the debt settlement company, even in the event of an unsuccessful settlement.|
|You’ll avoid filing for bankruptcy.||You’ll still have a monthly payment schedule you’ll need to fulfill.|
Bankruptcy should be your very last option when it comes to ridding yourself of your debt, but it is an option nonetheless. If you’ve found that you’re not in a financial position to consolidate your debt, and you won’t be for some time, it may be time to consider filing for bankruptcy.
By declaring bankruptcy, you’re telling a court that you can’t meet your financial debt obligations for the foreseeable future and need to be released from them. While credit card debt and medical debt may be released upon bankruptcy, know that you’ll still be responsible for debts like student loans.
Thankfully, while bankruptcy does a real number on your credit score, the process is successful for a little over 95 percent of people who file. To file for bankruptcy, your income can’t exceed a certain amount, depending on the type of bankruptcy you’re filing for.
|Pros of bankruptcy||Cons of bankruptcy|
|Some, if not all of your debt may be released.||You’ll be required to sell off some assets to repay debtors.|
|You can’t be taken to court by debt collectors if you’ve recently undergone bankruptcy.||Not all of your debt can be forgiven, like student loans.|
|May prevent home foreclosure.||Your credit score will take a serious hit. You could see your score drop by as much as 250 points. Bankruptcy will remain on your credit history for 7 to 10 years. This may make it difficult to obtain a loan or credit card.|
Things to avoid with debt relief
When seeking debt relief, you may be willing to do anything to finally say goodbye to your debt, but there are certain options you should avoid.
Don’t let creditors bully you
Creditors have no right to force you to pay if it’ll devastate you financially. The Fair Debt Collection Practices Act (FDCPA) dictates that creditors cannot harass you to get the debt paid. When you get a call from a debt collector, they need to identify themselves and who they work for. The FDCPA forbids them from:
- Calling repeatedly with the intent to annoy or harass you
- Using obscene language
- Threatening you or your family in any way
- Claiming you’ll be arrested for not paying your debt
While you shouldn’t ignore your debt and those trying to collect it, you should never feel pressured to pay more than you can handle.
Don’t borrow against your home
One way to pay down other debt or creditors is to take out a loan on your home (a home equity loan) and pay it with those funds. If you’re already struggling to make payments, this is a bad idea. These loans use your house as collateral. In the event that you can’t pay, your home could be seized in order to pay off your loan.
Don’t make a quick decision
It’s completely understandable that you’d want to take care of your mounting debt quickly, but not taking the time to research the right option for you could result in more debt and unexpected fees. Understand where you stand.
If you have poor credit and little money to dedicate to paying down your debt, a balance transfer card likely isn’t the best option, but debt settlement might be. If you can’t shake your debt, but your credit score is still decent, a loan could work. Look at the pros and cons of each option before making a final decision.
Be wary of fees
Many financial products don’t just come from goodwill. The companies offering these products need to make money. In order to do so, you’ll have to pay fees for most options. Balance transfer cards, for example, often come with a 3 percent balance transfer fee. If you have $10,000 in debt, that’s $300 just to move your debt over to the card. This fee may be worth it in the long run, but make sure you read the fine print of any and all financing you plan to get.
When your debt becomes too overwhelming and interest is making your balance insurmountable, you need debt relief. Debt relief comes in the form of many different financial projects. From balance transfer cards, debt management programs, loans, and even bankruptcy, you can get relief from your debt in a number of ways.
Depending on the method of debt relief you choose, you may have to meet basic requirements. While debt management programs and bankruptcy filing don’t require much of anything, financial products like debt consolidation loans or lines of credit require that you have good to excellent credit in order to qualify.
Again, depending on the method you choose, debt relief may hurt your credit for a little while but benefit you in the long run. When you work with a debt management team, it takes some time, but on-time monthly payments can raise your score. The same goes for balance transfer credit cards and loans. Bankruptcy is a different story. Bankruptcy can drop your score from good to extremely poor, and it’ll remain on your credit record for up to 10 years.