What to do if you’ve fallen back into debt
During the pandemic, it looked so easy to avoid credit card debt. You couldn’t go out to dinner and you didn’t need to buy clothes for work. And you were very scared about what the world would look like in the future. You promised to be good. And then the world reopened. Suddenly, it was OK to go to restaurants or fly on a plane for a long-delayed vacation. You survived — and you deserved a reward. So you bought stuff. And you charged it on your credit card.
Now the true extent of that buying splurge is becoming evident. Credit card balances have set a record at $986 billion — $60 billion higher than the pre-pandemic record of late 2019.
And according to Bankrate.com, more people are carrying debt from month to month — 46% of cardholders, compared to 39% a year ago.
Interest rates on those outstanding balances are rising. Card issuers are studying your credit report and recognizing that you have multiple cards with high balances. They have you trapped, so they can raise rates to 28% or more. Suddenly, you’re paying interest on interest — a “debt death spiral.”
Delinquencies are just starting to rise. And despite higher interest rates, many are turning to home equity loans and lines of credit. In the past year, HELOC balances had the largest increase in a decade.
All of these indicators are warnings of trouble ahead. So if you’re in debt, what are you going to do?
I’ve touched on the issue of consumer debt in recent columns. But here’s a complete strategy for dealing with the burden of consumer debt. So get started now.
Write down how much you owe on each card, the interest rate, and the current monthly minimum payment. Start dealing with the card that carries the highest interest rate.
If you can double this month’s minimum payment, and pay that same amount every month without charging another penny, you can pay off the card balance in less than three years — as opposed to 30 years of paying the new, slightly lower minimum every month!
If you can’t squeeze out the higher payment, get a temporary second job, even as a low-paid service worker. Devote all those earnings to debt pay-down. Seniors could rent a room in their homes, or drive other seniors to appointments. Every extra penny to pay down debt has a huge impact.
Transfer your balance to a zero rate card. Find them at CreditCards.com. But beware, the option of paying zero interest for 12-18 months is offered only to those with good credit scores. There are likely fees involved. And if you don’t pay down the entire balance during the zero-rate period, the interest rate will jump to 28% or higher.
Try for a personal loan at a lower rate than your cards charge. This strategy assumes you are not delinquent and have a good credit score. Search at Sofi. com or CreditKarma.com. But if you do pay off your cards with a personal loan, close all but your oldest card account to avoid the temptation to run up the balances again.
It’s possible to borrow from your 401(k) plan, if it offers loans. However, if you leave your job, you must repay immediately or face taxes and a 10% early withdrawal penalty. Plus, not repaying puts your retirement in jeopardy.
Beware of offers to consolidate your credit card debt! Typically, consolidators ask you to stop paying even the minimum balance and instead send money to a “holding account” that they will use eventually to make a settlement offer with the card issuer. In the meantime, your credit is further ruined — and your wages might be garnished.
There is one place you can go for trusted counseling: the National Foundation for Credit Counseling. Contact them at 800-388-2227, to be connected to the nearest local agency for trusted low-cost or free advice. The best solution might be a repayment plan through the agency, with creditors agreeing to a lower monthly sum and a write-off of some past due interest. Bankruptcy is a last resort.
The worst thing you can do is ignore the reality of this growing pile of credit card bills. It will only get worse. And that’s The Savage Truth.