Which is the Right Credit Card Debt Solution for You?

If you’re struggling to get out of credit card debt, you know you’re in a no-win financial situation. It feels as if the more progress you make toward getting out of debt, the faster life puts more debt right back on top of you. Are you aware that if you owe over $20,000 in high interest credit card debt, it could take you half a lifetime to get out from under it? It’s true, and many people owe far more than that .

The recent credit card reform legislation that was enacted in 2009 has made things a bit better for consumers , but you can easilly pay more in interest than what you spent on your card in the first place . Think about this one for just a minute . If you have $20,000 in credit card debt at 22% interest and you make the minimum payment, it will take you years to pay it off, even with the increase in minimum payments mandated by the new laws. It’s possible the recently enacted legislation may benefit consumers, but it is no debt cure.

How many years will it take? 5? No, it will take you longer than that to get them paid off. . How about 10 years? No, you are on the right track, but it will take longer than that until your debt is paid in full. Most credit card companies have a minimum monthly payment of 4% of your outstanding balance. That means that when you start paying on your $20,000 card your payments will be $800 a month!

Even with those hefty payments, if you pay the minimum payment, which will be lower as your loan balance decreases, it will take you almost 18 years to pay off your credit card, and cost you about $37,000! If you kept paying the initial $800 minimum, it would only take you about 34 months until you were debt free.

That is serious. What you need is a solution to your debt woes, so you can get out of debt. Life can return to the good, old days. There is one caution however. You must first find and fix the situation that caused you to get so far into debt in the first place. Was it a single, unexpected event, such as a natural disaster, or medical emergency? A common cause is a spending pattern where you consistently spend more than you make. This could be due to travel, shopping, gambling, or going out on the town. It is imperitive that you correct the cause of your over spending. If you fail to do that, any debt solution will be only a short term fix. You could actually end up far worse off financially than if you did nothing.

Debt Consolidation Loan – At the height of the real estate boom many more people used this option for credit card debt relief. One of the reasons that credit cards take so long to pay off is because their interest rates are very high compared to other credit such  as home mortgage or auto loan. That is because those 2 are secured loans, meaning the lender has some collateral they can use to offset their loss in the event you default on the loan. Their risk is relatively low compared to credit cards, which are unsecured credit. Unsecured means there is no collateral against your debt, so if  you default, the lender gets nil, nada, zip.

It makes sense that the lender would want a higher interest rate for unsecured credit than they would for secured credit because they have lower risk exposure. They are compensated for the higher risk by increasing the interest rates from the typical 5 – 8% rate for a mortgage or auto loan up to 15 – 25% that is ballpark for credit cards.
A loan for debt consolidation simply converts your unsecured debt to secured debt, so the lender faces less risk and can charge you a much lower interest rate. Typically the collateral used is the equity in your home or other real estate which you may own. You pledge that as collateral and the lender pays off your credit card balance. They give you a loan for the amount at a lower interest rate. You replace one or more high interest loans with a single, low interest one. This drops your payment substantially , and can allow you to pay off your debt much faster .

It is easy to see the danger in this strategy. The purpose of collateral is to give the lender somehting they can take ownership of, should the payments not be made. In this case the collateral is your home, which will be repossessed by the lender and sold. The proceeds will then be used to repay the debt. You’ll get what ever proceeds remain from the sale after the debt is satisfied and whatever fees associated with the foreclosure and sale are paid for. It is usually not much.
The problems with home mortgages in the last few years have created a very poor environment for debt consolidation loans, but thousands are stiil being made every month througout the country. Normally, a debt consolidation loan will not substantially affect your credit score one way or the other.

Debt Workout – This is a negotiated settlement directly with your creditors . Why would a creditor willingly offer to forgo being repaid on a debt? Typically it is because they think that there is a good chance that if they try to get the entire amount you may declare bankruptcy, and they would get little or nothing . Although this is more difficulty since the bankruptcy reform legislation was passed in 2005, it can still allow you to avoid paying back a substantial part of your debt. The lender knows this, so they are motivated to settle for a reduced amount, a lower interest rate, or both. They know that if you do declare bankruptcy, they’ll get much less, or nothing at all. As noted, this can negatively affect your credit score, although not to the extent that a bankruptcy will .

Debt Settlement – This is a great option for those with over $10,000 in unsecured debt, in part thanks to the Obama Administration’s stimulus program. Some of those dollars are finding their way to financial institutions to compensate them for taking a loss on their unsecured debts. This is a great thing for you if you fit this description. Your relief can be subsidized by the federal government, allowing debt solution companies to make deals they would have never made in years past.  

When you pursue debt settlement, you work with a debt settlement company to negotiate with the credit card company and other lenders you may have. You will pay the settlement company a fee for their services. Be sure you are aware of all the associated fees and charges before you sign any agreement. Be aware that although the company’s terms can be enormously beneficial to you, in some cases you can suffer substantial losses if you fail to follow the terms of your agreement.

Is there government money just sitting there to help me and others who are in debt?
There is a misconception that there is a large pool of dollars out there earmarked for consumers with debt problems. This is not the case, although the money does benefit consumers. It is genuinely provided to banks and other financial institutions to help keep them viable  in the case of large numbers of bad loans or other debt. The stimulus money allows lenders to be more flexible with their settlement cases, so that the money does indirectly benefit you if you are seeking to work with your lender.

Will this kind of negotiation affect my credit?

It is a common question, but sadly it is not asked by everyone looking at this as a possible option . Unfortunately for you, yes, it will have a negative impact on your credit score, but that may be a small price to pay for ultimately avoiding around half of your outstanding credit card debt, almost instantly. It will have some derrogatory effects on your credit score, but not nearly what you’d have if you were to get so deep in the hole wiht your cards that you defaulted on one or more of them .  You will be able to repair bad credit later. The fact is that many people never pay off such large debts, and simply default when times are tough. Another option is that they struggle along for decades, spending tens or hundreds of thousands of dollars in interest payments that they get absolutely nothing for. Many people in this situation feel that if their choice is a roof over their heads or defaulting on their credit card bills, they will choose sleeping in a nice, warm bed .

These are just some debt solution options options if you are in serious credit card debt, and sinking lower every month. You may feel that there is no way out , but there may be a real way to fix your financial problems . In fact, there is a good chance that you can find a solution to your problems that does not involve bankruptcy, which will follow you around for 10 years. It’s good to know that you can legally eliminate credit card debt, and may not have to be buried forever .