Credit card debt is a struggle for many Americans. We have recently been through a horrible, worldwide financial recession. The good news is, many Americans are starting to piece their finances together and begin a future of financial stability. However, for many, credit card debt may be hindering the process quite a bit! Not knowing of many options, several consumers are looking towards credit card debt consolidation as a way out. But, is this the best way?
What You Need To Know About Credit Card Debt Consolidation
Although credit card debt consolidation may look like the best way to go, for most, it’s not! There are far more downsides to most consolidation programs than there are perks. Here is a list of things that you will need to consider:
- Working With Third Parties: When it comes to debt consolidation programs, you will have to invite a third party into your personal finances. Unfortunately, many of the debt consolidation companies out there are new companies who started with the intentions of making money. Not knowing what they are doing, they could set you up for failure. Not to mention, the average cost of working with a third party on debt consolidation is around $3,000.00.
- Destroying Credit Scores: Although flashy salesman may try to hide this fact, the truth is, credit card debt consolidation will have a horrible effect on your credit scores!
Don’t Worry, You Have Cost Free Alternatives!
In all reality, debt consolidation is not the best option for most people. Also, considering the fact that you are able to get rid of your debts on your own, it simply doesn’t make sense to hire someone to take care of it for you at such a steep expense. Although, there are several alternatives to credit card debt consolidation, my favorite are creating aggressive payment plans, negotiating credit card interest rates and credit card hardship programs. Here is how these different options work:
Creating Aggressive Payment Plans
One of the most effective strategies for getting out of credit card debt is to create an aggressive payment plan. To do so, I always suggest using the debt stacking and constant payment method. This method has also been called the snow ball method. It is based on the idea that every time you make a payment, your balance reduces, ultimately reducing your minimum payment the next month. Using this method, even if you can only afford your minimum payment this month, next month, you will be able to send an extra payment to your principal! This payment method is also designed to target your highest interest rate first ultimately saving you in long term high interest rate charges! Here is how you should create your payment plan:
Step #1: Make A List Of All Of Your Credit Cards – Before you repair a roof, you have to take a look and see what is going on that’s causing the leak. This is the same with just about anything in life. Before you can get out of credit card debt, you have to know what debts you are working with. So, the first step that you should take is to make a list of all your credit card accounts. This list should be in order from highest interest rate to lowest. Also, it should include the lender name, interest rate, balance and minimum payment.
Step #2: Add All Of Your Minimum Payments Together – Now, it’s time to figure out how much you pay in total minimum payments each month. To do so, simply add all of your minimum payments together and write the total into your list.
Step #3: Decide On A Constant Payment – Your constant payment will be the amount of money that you will need to pay to your credit card debts each and every month. Look at your total minimum payments. This, I’m sure you’re able to pay. But, can you pay any more? Are you able to send anything extra? If so, write down the amount of money that you plan to pay to your credit card lenders each month.
Step #4: Allocate Any Extra Payments To Your Highest Interest Rate – If you have anything extra to send this month, simply pay all extra funds to your highest interest rate credit card. If you do not have any extra this month, that is OK, simply pay your minimum payment. In doing so, you will reduce your balance which will also reduce your payments next month. So, next month send the difference in payments from all of your cards to the account with the highest interest rate.
Step #5: Stack Your Debts – Once you pay off your highest interest rate credit card, continue with your same constant payment. Now, you want to allocate all extra funds to the next highest interest rate card. Simply continue doing this until your debts are completely paid off!
I have seen this payment plan save consumers thousands of dollars and years of paying off credit card debts. However, it is not for everyone either. This is the option that consumers should consider if they are not facing a financial hardship. Also, this option works best when coupled with the negotiation option.
Negotiating Credit Card Interest Rates
Another great way to get out of credit card debt is the process of interest rate negotiations. By reducing your interest rate through negotiations with your lender, you can save hundreds or even thousands of dollars over the life of your debt. When coupled with the constant payment and debt stacking methods, this is a debt relief plan made in heaven! Here is how you should go about negotiating your credit card interest rates:
Step #1: Get Prepared – As stated above, knowledge and preparation are key when it comes to just about anything, including making a plan to get out of debt. The first step in this process is also to make a list of your accounts. The list should also be in order from highest interest rate to lowest and should include the lender name, interest rate, balance, minimum payment and customer service phone number.
Step #2: Call The Lender With The Highest Interest Rate – Now, it’s time to get the negotiations under way. Start by calling the lender with the highest interest rate. When you call and a representative asks how they can help you, simply say, “I was going through my credit cards and noticed that this one by far has the highest interest rate. Although, I love the card, with so many balance transfer offers out there, I can’t see myself paying these high rates!”. At this point, the representative will either tell you that you qualify for a lower interest rate, you don’t qualify for one or you will need to speak with another department. If you need to speak with another department, simply repeat this step until you get an answer. Keep in mind, you will generally have a 30% to 60% success rate.
Step #3: Repeat Until You’ve Called All Lenders – Now, all you will need to do is repeat this process with all of your lenders. Simply give them all a call and see how many interest rates you are able to reduce.
It is surprising for many people how willing lenders are to reduce interest rates. However, if we think about it, big lenders are nothing if they don’t have lots of borrowers! They generally want to retain their clients. If you pay on time consistently and send the occasional extra payment, many lenders will bend over backwards to keep your business!
Credit Card Hardship Programs
In many cases, following the steps above simply will not provide the type of relief that consumers need. If this is your case, don’t worry! You can generally find relief in financial hardship programs. However, these programs are designed only for those who are experiencing a real financial hardship. Therefore, if you are looking for a lower interest rate or lower payments but are not having a hard time keeping up, this may not be the option for you. However, if you honestly in need of financial assistance, here are the steps that you will need to take.
Step #1: Get Prepared – For the credit card financial hardship process, a bit more preparation will need to go into this one. First, you will want to make a list of all of your household expenses. This includes rent/mortgage payment, utilities, cable, insurance, secured loan payments, unsecured loan payments, monthly medical expenses, child care, food, gas for your car and anything else you spend money on, on a monthly basis. Next, you will need to create a list of your income including all income sources with the exception of child support and alimony. Finally, write down the course of events that lead to your financial hardship.
Step #2: Call Your First Lender – Now, it’s time to start calling your lenders and asking for assistance. When the representative of the lender asks how they can help you, say, “Honestly, I’m having a hard time keeping up with the minimum payment on my account. I know that I owe the money and I’m beyond willing to pay! I just figured I’d call to see if you could do anything to help make my monthly payment more affordable.”. At this point, your call will generally be directed to the financial hardship department.
Step #3: Be Honest With The Financial Hardship Department – When speaking with the financial hardship department, they will ask you all kinds of questions about your expenses, income and what lead to your hardship. Be very honest with them as they are trying to gauge the extent of your financial hardship to see if they can help! Simply follow the lead of the representative you speak with and if you need the assistance, you will most likely receive it!
As you can see, credit card debt consolidation is not your only debt relief options. These three simple options all have the potential to save you tons of money and get you out of debt much faster! I hope that you’ve enjoyed this article of course. More importantly however, it’s my hope that you will use this information on your journey to financial freedom!