I hope you had a great week. Mine was productive but busy. This week I want to have a serious talk about credit card debt. While I am the first person to encourage credit card use, I do not support irresponsible use of any kind of money or credit. I know sometimes things are really hard and you have few choices, so we’ll take that into consideration.
First thing – if you use your credit card to subsidize your monthly income then, you either need to (1.) cut back on spending, if you have discretionary spending or (2.) get a new job that pays more or (3.) get a part time job (gig) to supplement your income. None of these is going to be easy, but if you are struggling with your finances then you must make some hard choices and put in some real action.
Let’s assess the situation.
Do you have multiple cards and are missing payments? Do you have repeat delinquencies? Are you more in the red than green each month? If so then we need to take action.
Why take action?
Living in debt from month to month is not a nice place to be. It not only affects your finances, it affects the way you feel about yourself and it is one of the main destroyers of relationships. So let’s deal with it. The sooner the better.
I’m going to assume that if the above applies to you, then most of the following is also true:
- Monthly payments on your credit card(s) is burdensome
- You have too many loans and expenses
- Your credit worthiness in jeopardy
- You keep digging deeper into the hell hole of debt each month
I’m not trying to scare you. We’re being real about this. You know I want you to live richly, but I want you to do so without worrying about creditors calling you. Ignoring the scary stuff won’t fix it. If you need a refresher go look back at lesson 1 and do the homework and then read lesson 2.
Even you only checked a few boxes above; you should look at the possibility of refinancing as soon as possible. It’s best not to wait until you are in bad debt to seek a solution. The deeper in debt you are, the more desperate you are likely to be and less likely to have options. So, I suggest you go in and speak to your banker as soon as you find that your situation has changed and you aren’t managing your bills comfortably. Getting some slack early on may give you opportunity to get back on a good financial track faster, it could also spare you the pain of trying to dig out of really bad debt. Credit card debt can spiral out of control really fast because of very high interest rates and the compound effect of fees adding up on debt, as well as, interest being added to the heap each month.
Benefits of consolidating or refinancing debt
- Debt consolidation simply means that you bundle all your debt together and work out a payment arrangement that is better for you. It allows you to combine multiple loan obligations into one, so you could combine your three credit cards, your car loan and your student loan, for instance.
- You will usually get a longer time to pay back. Shorter repayment periods usually require higher monthly payments. If you change a five year loan into an eight year loan, you will pay less each month. Over time, you will pay more interest on the loan but you may need to do this until you are in a better financial position and then you can make larger payments to pay off your debt more quickly and reduce the interest paid.
- You will make lower monthly payment amounts. This will allow you to come out of a bad debt situation and regain a good credit position.
- Most often lowers the interest rate. As best as possible ensure your refinancing is at a lower rate. Transfer from one high interest rate cards to lower interest rate card or transfer the debt to a credit union or commercial bank loan that affords lower interest rate as opposed to the high double digit rates charged on credit cards. Once you are in a more healthy financial position, you may slowly start using credit cards again bearing in mind all the lessons learnt. Of course there is the possibility that issuers will not give you an unsecured card after bad debt so the process will take some time. I did say it wouldn’t be pleasant, but you have to apply persistence and patience.
- Closing several cards and loans will eliminate multiple annual fees, multiple late fees and multiple over limit fees for the several cards. Late fees and over limit fees should discontinue entirely with more manageable monthly payments.
It is also important to remember/know the following:
- Negotiate outstanding balances on debt, especially if bad debt. Issuers always much rather collect some of outstanding debt than none. Most are open to negotiating for partial payoffs.
You may initiate the process by contacting your bank/issuer and asking for consideration for a partial write off of your outstanding debt. Indicate your current financial situation and what you can reasonably pay.
Sometimes banks/issuers will initiate offers and have campaigns to offer write offs to bad debtors. In these cases, there will likely be multiple tiers of offers with varying percentages of write offs. Most likely, the best offers will come first and will be reduced as time passes. Unfortunately, these offers usually only come when you are in really bad debt, so don’t wait for it. By the way, if you go to your issuer prior to your debt going bad and they tell you that you are fine, you must insist that you need help with your account. Busy customer service reps may try to move you along. Do it for yourself. Insist and persist.
- Once you have refinanced, good management practices will be essential to repairing your credit worthiness. Using a credit card may challenge and test you but you MUST make every effort to not return to your previous state. It can be very easy to slip back into unmanageable debt if you relax too much.
It will not be quick or easy. Your spending habits and mindset must change in order to support long lasting improvements.
- Go in or call and speak with your creditors and get the agreement in writing. You need proof. And make sure you READ before you sign.
- Convert to a lower interest rate card or 0% interest rate card-one that offers a 0% rate for transferring your balance from one issuer to another. This lower or 0% rate is usually valid only for a few months after which it goes to a much higher rate. Make use of the months of low interest.
This is one of the few times, I would advise you to take a payment holiday. You are going to pay interest anyway, so take the breather, if offered. But you MUST use the time to get your finances together, the lay a plan and outline how you will stick to it. If you get a lower interest rate and payment holiday, take it.
- Compare rates, compare offers and for goodness’ sake read the fine print! An offer that sounds too good to be true probably is. Ask someone who is financially savvy to read the offer for you and help to advise you.
- I’m repeating this for emphasis! Don’t wait until your debt is bad. If you wait until you are delinquent or in bad debt you don’t have much negotiating power. You are going to have to take what you get. Especially since your credit will influence your other financial deals when reported to a credit bureau -don’t hesitate to get help.
You can subsidize your income by doing gigs or offering professional services online. Check out my friend Sue-Tanya’s website. She makes good living from offering her services online. Go to www.Suetanyamchorgh.com to see what she is doing. You can do it too. It will take time to build up your business, but a few extra dollars each month could maybe pay one bill.
Take care of yourselves this weekend.
Insist and persist.
Spend Wisely. Live Richly