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Slay the Monster: How to Get Out of Credit Card Debt

Posted on 26 October 2010 by admin (2)

So, you’ve got a pile of credit card debt. Interest rates are high, and making minimum payments is digging the hole deeper. You’re anxious and not sure what to do. Are you ready to stop the pain? I thought so. Here’s a straightforward plan of action that will work – if you are serious about it! By serious I mean you are ready to do what it takes to get yourself back on a smart financial path even if it’s not very fun for a little while.

Stop the Bleeding

Just stop. Commit yourself to living on what you earn rather than what the credit card companies are willing to lend you. If you need some background on how credit card companies have enticed you down this dark path, how to create a viable budget, and why it will make you feel so good when you do, take a look at my last blog, “Credit Cards: The Anatomy of a Seduction“.

Get Clear About the Extent of the Damage

Get out all of your credit cards and all of your most recent credit card statements right now. You’re going to make a list with three columns: Credit Card Name, Interest Rate, and Total Balance Outstanding. List every credit card with a balance outstanding from the one with highest interest rate to the one with the lowest. It may be ugly, but you need to know what you are dealing with in order to find the best strategy to get to the other side.

And, Since You’ve Got the Statements Out …

After you take a look at the full extent of the damage, you may very well wonder: how did THIS happen??!! Well, the answer is right there on paper. LOOK at your statements and find out what you are spending. Did you buy food for your hungry children, or did you buy three rounds of drinks for your friends? It may be easier than you thought to cut your spending when you weigh the misery of carrying debt you can’t afford against the temporary high of a new pair of shoes, a latte habit, or eating out every week. I have a lot to say on the subject of getting clear about what you are spending and whether you are making the best long-term choices and I’m going to get into it in my next blog. Meanwhile, get a head start by keeping every receipt and credit card statement in a nice little pile, because these will be the tools for positive change in your financial life.

Consider the Options Available to You

There are always options. As long as you are breathing and thinking, there’s a way forward. One of the options below may be the solution, or you may need to use a couple of them. If you want help working through this, give me a call at 212-308-5495 or send me an email at thetaxxman@aol.com.

Take Money Out of Savings

One of the most common questions I get from clients who are in credit card debt is whether they should take money out of their savings to pay off their debt. Here are a couple things you should consider before making a decision.

    • Will you have enough money left after paying off your credit card debt to cover your expenses for 6 months in the event that you lose your job?
    • Is taking money out of savings really necessary? If you cut your budget in some ways could you pay off your credit card debt out of current income?

Get a Home Equity Line of Credit

If you own a home and have enough equity (generally more than 35% – 40%) you may be able to get a Home Equity Line of Credit (HELOC) to pay off your credit card debts.

Pros:

    • The interest you pay on a HELOC will almost certainly be lower than that of your credit cards.
    • The interest you pay on a HELOC is almost always tax deductible.

Borrow From Your Pension

Some pension plans allow you to borrow money from your account and pay yourself back in a structured way. The interest rate will almost certainly be lower than that of a credit card and the interest you pay is actually going back to your own account.

Warning:

    • The interest rate you pay on your loan may be lower than the interest rate your pension funds would earn if they were left undisturbed.

Transfer Balances to a 0% Credit Card

If your credit rating is good you may be able to get a credit card with a 0% balance transfer option. Google “0% credit card offers” and apply for one from a reputable bank or financial institution. You will probably have to pay a balance transfer fee, but that will pale in comparison to the higher interest rates you are already paying on your balances. Depending on the line of credit you get you may be able to transfer some or all of your outstanding debt.

    • Pro: This reduces the total amount of money you will have to pay to get out of debt.
    • Warning: This only buys you some time – the 0% rate will likely apply for just 6 to 12 months, after which it will be increased to standard interest rates. If you can’t arrange your budget to pay off the whole balance while the 0% rate applies you will be in a similar boat when the 0% rate expires.

Negotiate With the Credit Card Companies

Depending on your financial situation you may be able to negotiate with your credit card companies to reduce the amount you owe them. If you want help doing that give me a call at 212-308-5495 or send me an email at thetaxxman@aol.com.

Pro:

    • If you are successful in negotiating reduced liability you will obviously owe less money.

Cons:

    • This will likely damage your credit rating, making it harder for you to get a credit card, mortgage, or business loan in the future.
    • You will incur tax liability for the amount by which your debt is reduced. For example, if you owe $20,000 to a credit card company and they reduce it to $15,000, you will owe income tax on $5,000 in this tax year. Meaning, next April 15th you will have to pay taxes on $5,000. If you don’t have enough money to pay the taxes incurred you will have to pay penalties on overdue taxes to the IRS. Having said that, the tax liability will still be lower than $5,000, and any penalties for overdue taxes, if paid off in a reasonable amount of time, will be lower than the interest rate on the credit card debt, so you can come out ahead.

Are You Ready?

If you are ready to get the pain behind you, that’s great! Forward motion is good! Dig yourself out … it will be tough, but it will be worth it. And, if you need help, I am more than willing to work with you to find the best solution for your circumstances.

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2 Responses to “Slay the Monster: How to Get Out of Credit Card Debt”

  1. Michael says:

    Love this post!
    Maybe this is a good place to add info on negotiating with the credit card companies?


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