Okay, you’ve done it, you have reached your breaking point and come to the realization that you really need to do something about your credit card debt. It sucks with a capital “S,” trust me I know, I have been there; but fear not because with some diligence, and good old fashioned perseverance you can pay off those damn credit cards. If you feel at a loss as to how to tackle that beast perhaps some of the suggestions below can help get you on your way towards the debt free Promised Land. 1. Pay more than the minimum First, break the habit of paying only the minimum required each month. Paying the minimum only prolongs the agony. Besides, it's precisely what the banks want you to do; the longer you take to repay the charges, the more money they make on the interest, and the less cash you have in your pocket. Instead, pay as much as you can each month. Try to double your minimum payment or more. Look at your expenses - you can find the extra money. Skip eating out at lunch, bring it from home instead – you’ll probably be eating healthier too. Give up happy hour, and/or quit smoking. We all have vices and you know what yours are. It won’t be fun, but it will expedite your way towards the land of zero credit card debt. 2. Snowball your debt payments Take a look at all your credit cards; pay particular attention to the one with the lowest interest rate. Have you reached the maximum limit on that card? If not, try transferring a higher-interest bill to that card. Many credit cards permit this, and it's absolutely insane not to trade an 18% debt for one at 12%. If your entire balance is too large to fit on one low-interest card, pay at least the minimum amounts due on all of your cards except one. Focus the majority of your debt repayments into that one credit card, preferably the one with the highest interest rate, and pay it off as quickly as possible. When the balance on that card reaches zero, move on to the next card with the same aggressive repayment plan; only this time you are able to pay more because you will be paying the minimum, plus the amount you were aggressively paying on the card you just paid off. This is called snowballing. 3. Cash out your savings account You could cash out your savings and investments and use the proceeds toward debt repayment. Yeah, no one wants to do that; but sometimes it's just makes sense to do so. Even when debt interest is at 12%, your investments would have to pay more than 18% before federal and state taxes to equal that outflow of dollars. I doubt the money in your savings account is earning anything close to 18% interest. Pay off the debt, its equivalent to getting that 18% return without any risk on your part. The higher the interest rate on your debt, the more attractive repayment versus investment becomes. 4. Borrow against your life insurance If you have life insurance with a cash value, you could borrow against the policy. Yes, you're borrowing your own money; but the interest rate is typically well below commercial rates, and you can take your time repaying the loan. If you die before it's repaid, the outstanding balance plus interest will be deducted from the face value of the policy payable to the beneficiary. While that seems a small price to pay to get out of debt now, it could be burdensome to your loved ones should you pass before paying it off, so please do pay it off. 5. Ask family and friends Perhaps your family or friends could float you a loan. Who else knows, trusts, and loves you like they do? They may even let a late payment or two slide; but if you want to maintain the relationship, it's best to keep things on the straight and narrow by using a written agreement. You should clearly establish the interest and repayment schedule in writing to avoid misunderstandings and hard feelings. It goes without saying that you must adhere to that schedule; otherwise, holidays could be uncomfortable. 6. Get a home equity loan Assuming you didn’t withdraw all of the equity out of your home like many others did in the last 5 – 10 years. If not, now's the time to consider a home equity loan (HEL) line of credit for the maximum amount possible. A HEL gives you two ways to save. First, by using the loan proceeds to pay down your debt, you trade something like an 18% loan for a 6%-7% loan. Second, if you itemize deductions on your income tax returns, HEL interest is a deductible item under most circumstances. In a 25% marginal tax bracket, the 6% loan really has an effective rate of 4.5%, and that's probably the cheapest interest rate you'll see on a personal loan. 7. Borrow from your 401(k) If you participate in a 401(k) qualified retirement plan at work, you may be able to borrow up to 50% of the account's value, or $50,000, whichever is smaller. Interest rates are usually a point or two above prime, which makes them cheaper than that found on credit cards. As such, 401(k) loans may be a good option for debt repayment. Not only is the interest typically much lower than that on credit cards, the best part is you pay it to yourself. That's right; every dime in interest paid on a 401(k) loan goes into the borrower's 401(k) account, not the lender's pocket. There are drawbacks though: First, the loan and interest will be repaid with after-tax dollars, and the interest will be taxed again when you withdraw money from the 401(k) years later. Additionally, you must repay this loan within five years. If you leave your employment prior to full repayment, the outstanding balance becomes due and payable immediately. If it's not repaid, that amount will be treated as a distribution to you. You'll be taxed on that amount at ordinary rates, and if you're under the age of 59 and one-half years, you will also be assessed an additional 10% excise tax as a penalty for an early withdrawal of retirement funds, so ensure any 401(k) loan can be repaid before you leave your job. 8. Renegotiate terms with your creditors OK, you've done all you can. Your savings are gone; relatives have been tapped out; you don't have a home or 401(k) to borrow against. You feel like you're backed into a corner. Try pulling an ace out of your sleeve prior to taking that drastic step towards bankruptcy. That ace is the threat of bankruptcy. Let your creditors know your situation. Tell them that if they are unable to renegotiate terms, you'll have no other recourse but to declare bankruptcy. Ask for a new and lower repayment schedule; request a lower interest rate; and appeal to their desire to receive payment. Faced with the prospect that you may resort to such a drastic step, creditors will do what they can to protect themselves against a total loss. 9. As a last resort, file bankruptcy What if you decide you can't pay down your debt using any of the methods listed above? What should you do? The absolute last resort is bankruptcy. Most people believe everyone has a moral obligation to repay their debts to the best of their ability. There are times, when repayment may be impossible. In those cases, bankruptcy may be the only course of action left. This decision should not be taken lightly because there are drawbacks. This will be a black mark on your credit report for 10 years, thus ensuring you will have a hard time getting credit at reasonable interest rates during that period. Additionally, as odd as it seems, it costs money to file for bankruptcy. Attorneys and court filing fees cost in the hundreds of dollars, and they must be paid to get the relief you seek. Finally, bankruptcy laws have gotten a lot tougher in recent years, so you may not qualify for complete relief from your debt. There are two types of personal bankruptcy relief: Chapter 7 and Chapter 13. Chapter 7 is straight bankruptcy that allows the discharge of almost all debts. All debts except: alimony, child support, taxes, loans obtained through filing false financial statements, loans not listed in the bankruptcy petition, legal judgments against the petitioner, and student loans. While Chapter 7 relieves you of the responsibility of repaying most creditors, you may have to surrender much of your property to help satisfy the debt. Chapter 13 is different; you keep your property but surrender control of your finances to the bankruptcy court. The court approves a repayment plan based on your financial resources that provides for repayment of all or part of your debt over a three-to-five-year period. During that time, your creditors are not allowed to harass you for repayment. You also pay no interest charges on the indebtedness during the repayment period. When all conditions have been met, you come out debt-free from the bankruptcy.
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