Do you have credit card debt? You aren’t alone – about 60% of Americans have credit card debt and the average amount is $6,100, per Experian. While it can be beneficial to have a credit card in a pinch and there are cards with impressive rewards, carrying a lot of debt at a high interest rate isn’t a good situation. It’s especially bad if you have $30,000 in debt and are paying 20% or 30% interest. There are several ways to deal with credit card debt, but which one is best depends on your situation. Learn more about your options in this article, and speak to a loan professional today for more information on loan options.
Credit Counseling
If you have thousands in credit card debt and no way to pay it off, you may feel hopeless. But credit counseling may offer a solution. A nonprofit credit counselor can review your financial situation, consider your income, and determine if you can be helped with a credit counseling debt management program. About 60% of the people who go to credit counseling discover that the counseling plan can work for them if they dedicate a few years to paying off their debts.
A debt management plan offered by a credit counseling agency can lower your monthly payments by lowering the rate on your credit cards. If your income is not enough to pay off the debt in four or five years, the counselor may recommend bankruptcy. Some reasons to consider credit counseling are:
- You don’t have to go through bankruptcy, which can scar your credit report for many years.
- Credit counseling, unlike debt settlement, doesn’t cost anything, and it never hurts to learn about your financial and debt options.
- May devise a debt management plan that consolidates your bills into one monthly payment at a lower rate than what you paid before. Most debt management plans will pay off the debt in three to five years.
- Helps you understand budgeting and how to stick to one. You will understand the difference between good and bad debt and help you make financial decisions that reduce your need for credit in the future. Research shows that debt with those who got credit counseling is lower than those who didn’t receive it.
- Could help improve your credit score if it dropped because of late payments.
However, credit counseling doesn’t always work; whatever plan you and the counselor devise, you have to stick to it or it won’t work. Also, not everyone can pay off their debt in three or five years, so bankruptcy could be a better option.
Bankruptcy
Bankruptcy should be the last resort when you owe too much money and cannot pay it off. Reaching a bankruptcy settlement will usually take at least several months. The first step is to talk to a credit counselor to determine if bankruptcy is the best option. Then, you should retain an attorney and file for bankruptcy if you decide that is the best option. Most people file Chapter 7 bankruptcy, which liquidates and distributes your non-exempt assets and gives the money to creditors. The exemptions in Chapter 7 bankruptcy are generous, and most middle-class consumers do not lose a significant amount of assets during the process.
Another option is Chapter 13 bankruptcy, which may let you keep your car and house, but you will need to set up a repayment plan for other debts. Benefits of declaring bankruptcy are:
- You don’t need approval of your creditors.
- Chapter 7 gets rid of unsecured debt, including all credit cards, personal loans, and medical bills.
- You don’t have to worry about debt and collection calls anymore.
- You can rebuild your credit in a year or two after the bankruptcy is finalized.
However, bankruptcy can stay on your record for up to 10 years. In that time, even if you get loans, you will probably pay a higher rate. Some employers also may not hire you if they see a bankruptcy in your past.
Bankruptcy should only be considered if you don’t have any other choice. While you can recover from bankruptcy and have a good financial future, it isn’t something to consider lightly.
Debt Consolidation Loan
If you have a lot of credit card debt and want to pay it off, you may have heard that you can do a cash-out refinance or a second mortgage and use equity to do it. That is true for many people, but what if you don’t want to risk your home with a higher mortgage balance? In that case, you should consider a debt consolidation loan, which is a type of unsecured personal loan. Compare a HELOC to personal loans.
A personal loan is unsecured, which means that there is no collateral backing it, such as a home or car loan. If you don’t pay the loan, there is no property the lender can take back, but they can send collection agencies after you for the money.
Personal loans usually have a higher interest rate than a secured loan. However, if you have a credit score in the high 600s, you may be eligible for a personal loan at a reasonable interest rate. Talk to your loan adviser about how much you need to pay off your credit cards and they can run your credit to see what your best rate would be.
Summary
When you are drowning in $30,000 in credit card debt, it can feel like nothing else matters and there’s no hope. However, you do have options. Credit counseling can work for many people, and even bankruptcy, as bad as it sounds, can give you a clean slate and fresh start.
However, for many people, taking out a debt consolidation loan is the way forward. A debt consolidation loan can be taken out for thousands of dollars, and if you have good credit, the interest rate will be lower than your credit cards. You will have a fixed interest rate loan and will know how long you have to pay it off. Talk to your lender today about what your debt consolidation loan options are.
