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How to (And How Not To) Get Rid of Credit Card Debt
Now more than ever, the problems with massive credit card debt are coming to the fore front of our national culture. Against a background of dropping real estate values, unemployment reaching 1970s levels, and Wall Street in utter confusion, the steady accumulation of consumer debt by the whole of American citizens has become a drain upon the American economy and an utter weight dragging down the personal finances of almost every one of our countrymen. Households are now so utterly dependent upon credit cards for even the simplest of purchases that destructive buying habits have transformed our economy and negative spending is the order of the day. Furthermore, consumers have grown so used to dealing with their debt as a constant – credit cards somewhere between death and taxes on the list of modern inevitabilities – that they often can’t see any way out of their predicaments. In this article, we would like to merely offer a few suggestions for the harried borrower on how to best begin the process of debt management with an eye to erasing their credit card balances once and for all.
The first step, as with any emergency, should be the most obvious – do not panic. There’s reason enough to be concerned, of course, especially for those households who have already fallen into serious trouble with their financial obligations. It is understandable that borrowers who’ve begun taking out cash advances to pay down their other cards (and sometimes missing payments even then) must wonder helplessly what can be done. The very nature of credit cards, with credit now so very available despite lowered FICO scores and additional accounts regularly being offered even after other cards have been maxed, plays to shoppers worst instincts, and, almost before they’re aware, individuals and families can find themselves holding debt burdens than even their grandchildren might be held accountable for should debt spending continue unabated. However, breaking the chain of credit card debt is far easier than you might think. Once again, though, this sort of lasting debt relief requires a steady hand and reasoned deliberation regardless of the pressures you and your household may face.
The greatest immediate stress, of course, comes from the incessant harassment of debt collectors ringing the phone hourly to demand full repayment of delinquent bills (no matter how clearly unlikely such a scenario would be). For particularly unlucky borrowers, the collection agencies call so frequently and send so many threatening notices that the debtors just take the phone off the hook and throw their mail directly away. This is the wrong approach. This is nothing more than a weak surrender to the forces of credit card debt. Legislation has been passed in recent years giving delinquent borrowers far more leverage when dealing with unscrupulous bill collectors no matter how much the borrowers may owe. When a debt collection agency rings your phone, do answer and, with businesslike grace, explain that you are dealing with your situation and shall soon set up a payment plan, but, until things have firmly been organized, you would appreciate an end to the telephone harassment. Speak with a manager if necessary. Merely by informing the collection agent that you do not wish to receive calls, they are bound by law to refrain from any further contact. Furthermore, take down their information and send a letter – while keeping a copy for your own records – reiterating that you want an end to all correspondence. If they continue to bother you at home (or, even better for these purposes, at work), then you could take the collectors themselves to court!
Of course, just because you successfully ended the phone calls does not mean the creditors will suddenly forget about the debts you still owe. The next thing to do would be to call customer service for every single one of your debts – even the ones still in good standing – and request to talk with a representative one step up the corporate ladder who may be able to assist you in your plans for debt relief. Credit card companies do not want to lose a customer, as you may imagine, and they certainly want to know that their clients still intend on paying back their existing debts. To that end, a majority of the lenders will actively help lower interest rates (often by as much as thirty percent) temporarily, waive some of the over limit or past due fees and charges that may have accumulated over the years, and, almost certainly, work out a more favorable payment schedule once they truly believe you are in the process of straightening out your finances. If payments were late or unpaid because of a genuine calamity – be it unexpected unemployment or a family tragedy or even sickness and hospitalization – they will certainly be more willing to bend the corporate rules and may even overlook the missed payment: not that they’ll forgive the money but they sometimes will forget to send evidence of such to the three credit bureaus that effectively determine your FICO scores and credit ratings. Remember, the absolute worst thing for the lenders would be a declaration of Chapter 7 bankruptcy (though, as we’ll later discuss, this threat holds less and less water) or a simple abandonment of payments altogether that would force the credit card companies to discharge the loans for tax break purposes. Both options are fairly ruinous to the borrower, but they yet happen often enough that the credit card conglomerates will do whatever it takes to prevent any chance of such occurring.
The borrowers themselves however should avoid any possibility of actual loan default. While the companies themselves may be able to land hefty tax exemptions for their presumed losses, they still maintain legal proprietorship for the debts and could put a lien on the debtor or take them to the courts at any time. Similarly, bankruptcy protection, much as it is regularly portrayed in the media as the answer to a desperate borrower’s prayers, has been severely neutered by recent changes to the United States bankruptcy code and no longer offers any guarantee for those debtors still gainfully employed. Using something called the means test provided by the Internal Revenue Service, the courts now send most debtors seeking Chapter 7 debt elimination bankruptcy protection into the debt restructuring program of Chapter 13. This is essentially a debt management program as overseen by the less than understanding guidance of the federal government and one that, though credit cards will be paid by penalty of law, seems hardly worth the expense of bankruptcy attorneys. With both, the effects upon FICO scores and credit ratings cannot be overestimated. By declaring bankruptcy or defaulting upon a loan, you not only are giving up credit opportunities now, you are giving up access to homes, vehicles, even, these days, employment potential for nearly a decade of your life. Credit card debt must be dealt with, but there are better solutions available.
Different, but similarly worrisome concerns, should be raised about the debt consolidation alternatives thrown around so often these days. Most of these options are only available to homeowners whether through refinancing the first mortgage or taking out a second mortgage at considerably higher interest rates (though they should still be well below what would be offered by credit cards), and there’s two problems that all homeowners should think about. The first one’s more conceptual in nature. Although credit card debts would largely be assimilated into the home equity from these sort of loans, leaving the original accounts open and untouched, this does nothing to change the spending behaviors that led to these problems in the first place, and too many borrowers faced with suddenly open cards revert to their old habits and buy as recklessly as they did before. Indeed, with terms unnaturally extended to twenty or thirty years, they may barely notice the equity loan payments though they’ll end up paying for several times the original balance before everything is all said and done. More worryingly, with the economy in such dire straits and property values continuing to drop, maintaining equity should be a priority for every homeowner. After all, the average American’s greatest investment is their primary residence, and they need to make sure that equity exists in case of some eventual troubles later on. If the real estate market continues to falter (based upon larger financial troubles spurred, ironically, by the failure of so many sub prime mortgage lenders), many borrowers could find themselves with negative equity just when they need it the most.
There are other options that should be avoided. Consumer Credit Counseling companies have also become increasingly popular as Americans struggle with credit card debts. You’re probably familiar with the more basic outline of their programs: debt professionals work with clients on a specific strategy for reduction of unsecured debt (credit cards, almost always) and, afterwards, they contact the creditor representatives on their clients’ behalf to argue for lower interest rates and, when possible, a waiver of past fees. Not only are their vaunted services almost exactly what borrowers could do themselves without the high priced ‘advice’ (the Consumer Credit Counseling charges are ridiculously extravagant considering their limited results) but, often as not, the CCC industry also asks the creditors themselves for remuneration simply for keeping their clients away from Chapter 7 bankruptcy. Add to all of that the dangers regarding credit scores, since CCC assistance is recorded on credit reports and viewed almost as poorly as bankruptcy protection by debt analysts, and we would have to suggest all but the laziest debtors find another route toward debt elimination.
Debt Settlement, on the other hand, though the program seems superficially rather akin to the Consumer Credit Counseling approach, has actually a unique tactic that’s quickly winning converts given our current struggles. As with home equity loans, Debt Settlement firms will consolidate your debts at a lower rate but also insist upon a repayment schedule of no more than five years. Like Consumer Credit Counseling companies, they will sit down with their clients in order to find a debt elimination program that best fits the clients’ individual needs, but, without taking any monies from their opponent, they successfully negotiate an overall reduction of the credit card balances that (depending upon the situation) can hit up to sixty percent! This, obviously, is something the average debtor can not hope to accomplish on his or her own. It takes not only the arbitrating skills and industry experience of the Debt Settlement counselor but also an assurance that each lender will give up no more than the others – a neat runaround of corporate greed only possibly from the initial consolidation provided by the Debt Settlement company. There are costs to this, as there are for any financial proceedings, but, unlike as with bankruptcy attorneys or CCC salesmen, most Debt Settlement consultations are free of charge.
Still and all, this is about what each household can do to better their own situation. For any potential debt management process, questions must be asked, and, above all else, certain destructive habits must be abolished. Stop using your credit cards! Cut back whenever necessary! Take out a second job! Hold a yard sale or sell on line things purchased that you do not absolutely need! Make sure that you have the money available to actually pay back the debts you have already accrued! And, this may be the most important lesson, put in the time to calculate a family budget and stick to it. Credit card debts, by and large, grow because of household spending that has been unchecked for years, and, without a decided change of heart, those debts will only return once the credit card balances have been eliminated. This is not merely a temporary problem to be forgotten about along with the bills. Credit card debts are the sign of a larger cancer eating away at the American economy – a lax approach to spending and a willful avoidance of the troubles at hand – and, the harder it may seem to scrimp and work your way out of the credit card debt hole, the better it may be in the long run.
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