Credit Card Debt Solutions

From LoveToKnow Creditcards

Sometimes a person doesn't realize the magnitude of their debt problem, they wait to start looking for credit card debt solutions when they are in major trouble, or they just don't know what to do. In this interview Andrew Housser, co-CEO of Bills.com provides no-nonsense answers about the potential ramifications of debit providing actionable steps to get out of credit card debt.

At what point am I considered to be really in trouble with credit card debt?

A “yes” to one or more of these questions signals trouble:

  • Are you behind on any monthly payments?
  • Are you getting calls from collectors?
  • Do you find yourself juggling credit card balances to pay off other debts and bills?
  • Are you using credit cards (and carrying balances) to pay for necessities (food, housing, utilities and auto payments)?

Bottomline: If you are not able to pay off your credit card balance in full each month, it might be an indication that you are living beyond your means and you might be in a vicious cycle of credit card debt.

What can happen if I have credit card debt issues?

  • Lower credit scores – The higher your credit score, the better interest rate you can receive on a loan, such as for a home or car. A credit score can even mean the difference between renting an apartment or not, and sometimes in getting a job.
  • Reduced quality of retirement – With a retirement income, debt issues can pile up and credit scores can suffer. To keep this from happening, would-be retirees should:
    • Give retirement a "dry run" – Live on your anticipated post-retirement income to make sure you don't need to rely on credit cards.
    • Pay off remaining debt before you retire – This includes credit cards, vehicles and home mortgages.
    • Make house moves before you retire – If you plan to move to a smaller home or make any remodeling changes to your current home, consider implementing your plans before retiring. You are likely to receive better mortgage or home equity terms with your current income than you will later.
    • Keep the cards – Think twice about closing old credit card accounts. If you close unused accounts while maintaining some debt, you can end up with a higher debt-to-credit ratio. This will look like a greater credit risk – and will lower your credit score.
  • Severe debt hardship – Today, more people are falling into severe debt hardship because they have mismanaged credit, had an unexpected job loss, medical expenses or divorce. With recent bankruptcy reform, it is harder to declare bankruptcy, so these individuals face great difficulty in climbing out of spending and debt patterns.

How does debt affect a FICO score?

  • Lower credit score – Credit scores are impacted by how much debt an individual carries. Scores range from 300 to 850, with higher numbers indicating better credit – or a greater likelihood of repaying debt:
    • The median credit score in the United States is about 725.
    • A score below 680 usually results in a borrower being charged a higher interest rate or denied credit altogether.
  • Higher debt-to-income ratio – FICO does not have access to your income information so credit scores do not take into account your debt-to-income ratio (the percent of your income that goes to pay fixed monthly debts such as credit cards and loans). However, your overall credit profile, and a lender’s decision to lend, will be impacted by your debt-to-income ratio. The higher the debt, the more risk, and the less ability you have to obtain a lower interest rate.
  • Higher percentage utilization – If you have a credit card with a $10,000 limit, and you owe $3,500, that's a 35 percent utilization. Utilization over 35 percent is considered high and can negatively impact credit scores.
  • Late payments – Late or missed payments will have a negative impact on your score. If you have multiple accounts that are multiple months behind, the negative impact will be greater.

Can I reduce my credit card debt if I can only afford to pay the minimum balance?

You can reduce the debt, and eventually pay it off on minimum payments – but you will end up spending significantly more on the original purchase, and it will take a long, long time.

In 2006, almost all banks increased minimum payments on credit to comply with requirements of the Office of the Comptroller of the Currency (OCC). Minimum payments increased from 2 percent of the balance to 3 or 4 percent. For those paying only minimum payments, this increase meant many people saw their payments double.

What are the five steps I can take to reduce my debt?

  1. Knock out overspending – First, write down all expenses in two categories: Necessities (housing, food, clothing) and Extras (designer clothing, movies, dinners out, lattes). Then, allocate a weekly budget for extras, and if you go over, cut yourself off.
  2. Go on a “crash diet” – If expenses exceed your income, take immediate action and eliminate extras completely.
  3. Prioritize debts – A mortgage payment should take absolute first priority with a car payment taking second priority. Third priority would be unsecured debts (credit cards, loans) in order of highest interest rates.
  4. Pay off the highest interest rate card – Make minimum payments on all other credit cards. Continue until all cards are paid off.
  5. Reduce the debt – It is best if you can handle your debt issues yourself, because it protects your credit scores. If that’s impossible, you can:
    • Negotiate with creditors – If you cannot even make minimum payments, ask your creditors for temporary hardship status. Some creditors will work out payment plans with you.
    • Attempt debt resolution – A debt resolution firm will negotiate with creditors on your behalf to lower principal amounts due. You would then pay the debt resolution firm a percentage of savings obtained. Savings can often reach up to half the full amount owed.
    • Declare Chapter 7 bankruptcy – You can wipe out almost all debt, but is now much more difficult to obtain after the 2006 bankruptcy reform.
    • Declare Chapter 13 bankruptcy – You will be required to repay at least some of your debt on a repayment plan. Repayment terms generally are less favorable than those found with debt resolution.
    • Get credit counseling – Most credit counseling agencies receive funding from creditors, meaning they are working for the creditor, not for you. They have little interest in getting you out of debt or in giving you credit card debt solutions. In constructing a “debt management plan” for you, they will only reduce the interest rates, not the principal owed.

For More Information on Credit Card Debt Solutions

Andrew Housser and his co-CEO Brad Stroh are the co-founders of the Freedom Financial Network, LLC, and its consumer personal finance portal Bills.com, where consumers can learn about and comparison shop for credit, loan and insurance products and services.

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