Getting Out of Credit Card Debt

Getting out of credit card debt is the first step toward financial security. High interest rates make credit card debt some of the worst debt to own, and the hit to your credit rating for late payments can damage your future investment potential. You may feel like you are drowning in debt, but getting your head above water is not impossible.

For years, credit consumers had a false sense of security that their debt was under control. Credit limits were set high, so there was always more money available. Monthly payments were artificially low, so making the minimum payment was easy. It was a grand scheme on the credit industry's part to make borrowing seem risk-free. The price of easy borrowing is sky-high interest rates, and many people end up owing many times more than they actually spent.

The first step to getting out of credit card debt is to have a reality check. Cutting the plastic can be difficult, but realizing that money is finite is crucial. Start by keeping a physical budget where you record every purchase. There are free programs on the Internet that manage budgets for you, and even categorize your expenditures. When you see exactly where that money is going, you can separate the necessities, from the extras, like purchasing a foreclosed home.

Use that budget to pare down your expenses. If your spending is greater than your income, it is time to cut down. This is no easy task, but it is necessary for your financial future. You may not be able to maintain the same lifestyle without borrowing, but you must dig yourself out of debt.

Next, start paying down your debt. Making the minimum monthly payments will do nothing to put a significant dent in your debt. According to MSNBC, paying $460 each month on an $18,000 credit card balance will save you $42,400 in interest and have you debt-free in just five years.[1] Make this process less painful by putting the credit card payment with the first-of-the-month bills like rent, electricity and groceries. Even better, have the money directly withdrawn from your paycheck to pay the bill; if you never see the money, you'll never miss it.

Alternative Plans

If paying down your debt in time seems like an impossibility, contact the lender or a credit counseling agency for help. After 90 days of nonpayment, the account becomes delinquent, and the interest can become crippling. A credit counselor can help find a solution, but don't fall for debt consolidation or credit repair scams. These tend to collect your money without ever passing it to the lender, putting you deeper in debt than before.

The credit card company may be willing to negotiate an alternate payment plan with the help of a credit counselor. A debt management plan consolidates your debt, waives late fees and lowers interest rates. Your credit line is cut off and your credit rating will take a hit, but this plan can get you out of debt in five years.

Another option is forbearance. The lender will "stop the clock" on your payments so you are not accruing interest or late fees, but only under specific circumstances like short-term disability. Under a workout plan, the lender cuts interest rates and waives fees temporarily, but the consequences include a credit rating dip and loss of card use.

Settlement and bankruptcy should be last ditch efforts at getting out of credit card debt. These allow you to pay less than you owe, but your credit score will be obliterated. These are not get-out-of-jail-free cards--they are expensive and highly damaging, but they are an option for the desperately indebted. Retrieved 2011-09-13

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