An Oasis of Relief for Credit Card Debtors

For a generation that has been accustomed to never leaving home without it, the convenience and practicality of instantaneous credit cards offers mixed blessings, and for some, comes at a heavy price.  Whether hounded by debt collectors, dreading the sight of their monthly statements, nearing or exceeding their credit limit, or watching their marriage on the rocks as a result of overdraft and late fees, an increasing number of Americans are losing sleep over credit card debt.  With savings that are dwindling, a growing recession, and inflation on an upward trajectory, dependency on plastic money is at an all-time high.  Driven by factors as varied as unemployment, living above one's means, and tough circumstances such as emergency hospitalization, credit card payments are consuming a significant chunk of borrowers' incomes.  While there is no quick fix for achieving credit card debt relief, a strong dose of self-discipline, hard work, and persistence can pave the way for a debt-free future.

The most popular and effective methods of credit card debt reduction and elimination are as follows:

1. Credit card debt settlement

   Other than bankruptcy, this is the fastest and least costly debt relief measure.  Borrowers negotiate with their credit card issuers to pay a portion of the amount due, instead of full payment of the outstanding principal.  Typically, credit card debt settlement lowers liabilities by at least 50% and allows debtors to make a single, low monthly payment.  Consumers may complete a settlement in as little as one to three years, although on average, it takes approximately three to five years to do so.

2. Credit card debt consolidation

   This approach involves combining several outstanding credit card balances into a single monthly payment.  Consumers reap the following benefits when they consolidate credit card debt: (1) a drastic cut of their debt through a substantial reduction of their monthly payment (often as high as 70%) and (2) one manageable payment to one lender instead of multiple payments to different lenders.  Credit card debt consolidation may take the form of a debt consolidation loan or balance transfer. 
   A debt consolidation loan offers an interest rate that is considerably lower than that imposed by the borrower's credit card companies.  Consumers may avail themselves of such a loan at finance companies, credit unions, banks, and other financial institutions.  They may choose between a secured (collateral needed) or unsecured (collateral not required) debt consolidation loan.  Secured loans that provide credit card debt relief include second mortgages and home equity loans.  With the latter, borrowers obtain a loan against their home equity to repay their debts.  Since the loan is backed by security, the rate of interest is usually reduced.  With a balance transfer, consumers may apply for a zero or low-interest credit card and transfer high-interest credit card balances to it, thus saving money.

3. Credit counseling

   Credit card debt help may also be obtained via a debt management company or credit counseling agency, which negotiates with its clients' creditors to restructure and eliminate unsecured debt.  Consumer Credit Counseling Service (CCCS) and Money Management International (MMI) are two leading nonprofit organizations that provide debt management guidance, free credit counseling, and confidential financial assistance.  They evaluate debtors' financial situations and design a debt management plan (DMP) in which borrowers issue monthly payments to the organization, which in turn disburses the funds to their creditors.  DMPs offer a multitude of benefits including the following:

   1. Significant reduction in interest charges
   2. Waiver of over-the-limit and late fees
   3. Re-aging of account
   4. Shorter repayment period;
   5. Cessation of collection activity
   6. Lower monthly payments
   7. One easy monthly payment disbursed directly and individually to each of the borrower's creditors

   With a DMP, borrowers may pay off their credit card balances within five years.

4.  Non-usage of the credit card

   Another effective way to eliminate credit card debt is to refrain from adding additional charges on the cards and to utilize only the card boasting the lowest rate of interest.  With respect to that card, it should only be used when absolutely necessary. 

5. Payment in excess of the monthly minimum due

   By paying an amount higher than the minimum monthly amount required, borrowers will rapidly reduce their credit card balance.

6. Snowball effect

   This widely-employed method of wiping out credit card debt is extremely efficacious and easy to apply.  It involves the following steps:

   • Making the minimum payment on the credit card with the highest interest rate plus any extra amount that the borrower can afford
   • Tackling the second highest credit card balance by applying the amount paid on the first balance towards the second liability and adding the minimum being paid on the second balance
   • Paying the minimum due on the remaining cards and continuing this process until the entire balance is cleared
7. Enrollment in a credit assistance program
   
   
8. Loans from friends or family
   
   
9. Bankruptcy filing

This is generally a debt relief measure of last resort and an attractive alternative for individuals with very high credit card debt and an insufficient income.  In a Chapter 7 bankruptcy, a debtor's assets of value are liquidated and the proceeds used to pay off the creditor.  Individuals without any assets of value are cleared of any outstanding credit card debt.