If you’re struggling with credit card debt, you’re not alone. U.S. household debt rose to an all-time high of $13.15 trillion by the end of 2017, according to data from the Federal Reserve Bank of New York. Out of that debt, credit card balances increased by $26 billion over a three month period and those in serious delinquency – or those 90 days or more overdue – rose from a year ago.
For many, dealing with credit card debt is a source of stress and shame. According to a survey conducted by Marcus by Goldman Sachs, over a quarter of creditworthy Americans in credit card debt who feel it’s a major issue say it impacts their mental health. Half say they don’t feel comfortable talking about it because they believe it has negative associations.
It doesn’t have to be that way. Grappling with credit card debt isn’t easy but it can be done. Here are five things you can do right now that can help you manage your credit card debt.
If you are struggling to make payments on your credit cards, you may need to make some changes. This might require lifestyle changes - either big or small. One place to start is by planning a budget. To pay off debt, you may need to cut back in some areas so you’ll have money left to pay off debt. To be sure, this is easier said than done but it may well yield the most dramatic results.
Credit card companies calculate the minimum required payment using a percentage of the total balance – which can range from 1% to 3% – plus any applicable fees.
Paying the minimum may save you a little cash in the short-term, but will cost you much more in interest later on. The total amount of the debt you owe can quickly balloon because of compounding interest. Making more than the minimum payment is important in order to make a dent in the principal debt.
For instance, say you have a credit card balance of $10,000 with a 14% interest and the minimum payment is 2% of your credit card balance, or $200. If you made minimum payments only, it would take more than 30 years to pay off the debt and $13,288.14 in accrued interest. If you pay more than the minimum, you can pay off the debt faster and pay less in interest.
Consolidating your debts using a personal loan could make it easier to pay off debts. Consolidating debt means rolling all (or some) of your debts into one. Instead of making numerous credit card payments, you could have just one recurring monthly loan payment. You may also have more favorable terms by consolidating debt since personal loans could have a lower interest rate than credit cards.
Another benefit of consolidating debt using a personal loan? Fixed interest rates. Credit card interest rates are usually variable, meaning interest rates could change. By consolidating your debts into a personal loan, you could lock in a fixed rate, making for predictable monthly payments. Also, if you’ve reached the limit on your credit cards, consolidating debt into a personal loan could improve your credit score. That’s because the credit utilization ratio - or the ratio of your outstanding balances to the amount of credit available - plays a big role in your credit score. Paying off the credit card debt with a personal loan could help improve your credit utilization ratio.
If you are really struggling to make payments, try negotiating with your credit card company. You might be able to move the payment date, reduce the interest rate or have some fees forgiven. Before you call, understand some of the options and figure out how much you can afford to pay.
One possible option is a workout arrangement with your credit card company. Under such an arrangement, the credit card company may agree to waive or lower the minimum monthly payment, lower your interest rate, remove past late fees or over-limit charges. Just know that if you do come to a workout arrangement, your credit line could be cut off. Not only will you lose the use of that card, the loss of available credit could adversely affect your credit score.
Another option could be to negotiate a settlement for less than the full amount owed through a lump-sum payment. The difficulty with this option is that it typically requires a large sum of money. Lump-sum settlements can sometimes be structured as three separate payments. If you are able to come to such an agreement, make sure the lump sum that you are paying will settle the debt and get written confirmation. Debt settlement is typically a last resort option after you’ve already missed many payments. A credit card company is unlikely to accept less than the full amount owed unless there’s reason to believe you cannot pay balance. Debt settlement is also likely to leave negative marks on your credit report that’ll last 7 to 10 years.
Whenever negotiating with your credit card company, be sure to document your conversations. If you are asking for something more involved, such as a workout arrangement, you may need to ask to speak with a supervisor. If you do come to an arrangement, get it in writing.
If you’re not quite sure how you ended up with debt or find it hard to make timely credit card payments, entering into a debt management plan or credit counseling could be helpful. A credit counselor is someone who can look at your situation in detail to help you create a plan that takes into account your monthly budget, total debt and savings goals.
A debt management plan is another possible solution. When you start on a plan, you write a check every month to a debt management company, which pays your creditors. A non-profit financial counseling agency is a good place to start. They can draft a debt management plan for you, and it may be able to negotiate with creditors on your behalf. The agency could help you negotiate lower interest rates, saving you money. There’s also the ease of one monthly payment.
As long as your payments are on time, the fact that you are enrolled in a plan will have a minimal effect on your credit score, but while enrolled your accounts will be closed and your access to new credit will also be limited until debts are paid off. The changes to credit limit and length of credit history could in turn negatively affect your credit score. Your report will also have a note indicating that your debt is being managed by an agency. Because of the potential impact to your credit score and credit history, debt management plans are a last resort option. The cost for debt management plans through non-profit credit counseling agencies vary, but are usually around $25 to $55 a month.
While credit card debt is a common struggle, it doesn’t have to be yours. Asking for help and making some changes could put you on your way to getting rid of that debt.