American consumer debt has rebounded to prerecession levels, and the category that includes credit cards hit a record $1.02 trillion this summer. Maybe your credit card debt has crept up, too, setting your own personal record.
It makes sense to pay particular attention to your credit cards, because their interest rates are typically higher than other types of debt, like student loans or a mortgage. Carrying balances on this more costly debt may derail goals such as building a retirement fund.
If your other types of debt are manageable, but your credit cards feel out of hand, you need to assess your situation first. Then you can choose a way to handle that debt , whether it’s a self-guided payoff strategy or some type of debt relief, perhaps even bankruptcy.
Finding your starting point
First, take stock by:
Making a list of all your credit card balances. Note the interest rate and minimum payment for each.
Comparing that debt to your income. Add up your total credit card debt and divide it by your annual income. For example, if you owe $5,000 on your cards and make $50,000 a year, your credit card debt is 10 percent of your income.
Determining what you can pay monthly. See if you can pay extra on top of your minimums.
The path you pick from here depends on your debt level and whether you can pay more than the minimums.
When to try DIY
If your credit card debt is under 15 percent of your income and you can pay more than the minimums, take a do-it-yourself approach.
Two common methods are “debt avalanche” and “debt snowball.” Here’s how they work.
Avalanche: Arrange debts by interest rate and pay off in order from highest to lowest. Keeping your focus on the most-expensive debt saves money on interest.
Snowball: Arrange debts by balance and pay them off from smallest to largest. This can give you some quick victories to build momentum toward tackling bigger debts later.
With either method, pour all your extra payment money into the debt you’re focusing on and pay the minimums required on the others.
After wiping out the first debt, stack what you had been paying toward it on top of the minimum for debt No. 2 and keep going. You’ll end up plowing an ever-larger payment toward your targeted debt, speeding up progress.
Tip: Take advantage of nonprofit credit counseling agencies that offer financial advice, much of it for free, on budgeting, for example.
Considering debt relief
Debt relief – getting a lower interest rate or a reduction in what you owe – can make bigger debt loads more manageable. You may need it if you’re having difficulty paying the minimums or your credit card debt has exceeded 15 percent of your income.
Pick from three common options:
Debt consolidation. Several debts are rolled into one at a lower interest rate, often by getting a personal loan or using a balance transfer credit card.
Debt management plan. You work with a nonprofit credit counseling agency to set up a structured repayment plan over three to five years in return for lower interest rates.
Debt settlement. Typically, a debt settlement company diverts your payments to an escrow account. As late payments mount, your creditors may agree to accept less than the amount owed. But damage to your credit is substantial, and exploring bankruptcy may make more sense.
“If you find yourself not able to meet your obligations, are missing payments or are only doing minimum payments, it’s a good idea to look into debt relief,” said Thomas Nitzsche, communications lead at Money Management International, a nonprofit credit counseling agency.
Tip: Seek a free consultation from a bankruptcy attorney to make sure you’re not trying to pay off a debt load that’s unsalvageable.
When bankruptcy is best
A credit card debt of over 50 percent of your income can be impossible to pay back, even with extreme budget cuts. Struggling under so much debt can endanger basic financial needs such as saving even a little for retirement.
Resolving debt through bankruptcy can provide a clean financial slate. The filing will stay on your credit report for seven to 10 years, depending on whether you file Chapter 7 or Chapter 13. But your credit score could rebound more than 80 points within six months of filing, according to the Federal Reserve Bank of Philadelphia.
Tip: Bankruptcy can be one of the least expensive and fastest ways to resolve overwhelming debt.
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