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How to Deal with Credit Card Debt

Updated on November 21, 2019
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Michael is an avid content writer and researcher on various topical subjects related to personal finance and career development.

The Credit Card Debt Challenge

Credit card debt and personal bankruptcies have increased bank profits tremendously in the last few years. It has long been a lucrative source of gain for financial institutions worldwide.

The amounts keep piling up every quarter. According to the Federal Reserve, the total national credit card debt in the United States now exceeds $1 trillion.

It has been named a financial killer.

To many, on a personal level, it is becoming much more than that.

The ease of acquiring and using credit card makes it all the more attractive and enticing to those who do not realize what they are actually getting themselves into.

The Crisis

Credit card debt feels like a jail sentence that can take decades to come out of. And the tragedy is that once you are caught in its grasp, a huge percentage of what you earn will not be put into anything that is of use to you at all. It will all go into paying interest that has accumulated over time.

The ease of acquiring and using credit card makes it all the more attractive and enticing to those who do not realize what they are actually getting themselves into. It is easy to buy into the illusion that one has an unlimited pool of money. Unfortunately, this is also where excessive spurlging begins.

In the meantime, creditors don't really care about your personal challenges because they know that at the end of the day, they win. This is because of all the interest payments that you will have to pay back.

Added to the above, credit card companies have been known for charging additional rates on goods purchased without notifying the buyer in advance. So say for example, you bought a household appliance at 5% rate of interest using your credit card, they could raise it to 15% and you will not be aware of the increment.

Granted, there are those who may have landed in credit card debt due to an unfortunate emergency or an unexpected tragedy in their lives. But in most cases, people end up accumulating huge credit card debts over time due to wrongful spending habits and poor financial decisions.

However, despite all these issues, there are ways in which one can become debt-free once and for all.

The Allurement

One leading cause of this problem is the fact that those who accumulate credit card debt are initially lured in by the glowing benefits associated with it. These enticements include additional insurance coverage, reward points, flight discounts and so on.

What a lot of customers fail to realize is that such benefits are strategically promoted to hoodwink them - to hide from them the reality that they are actually entering into a contract which is more costly than a regular loan.

The customer is usually unaware of the terms and conditions hidden in the fine print. So when the contract takes full effect and the fees are charged together with the interest, the balance begins to spiral out of control.

Others are nose-deep in debt, having been targetted by the credit card companies as early as when they were teenagers or young adults.

Back then, their mental awareness had not fully developed to the level that they could make rational judgements on what they really wanted for their lives and their future.

They did not fully grasp the consequences of what they were getting into. Before they could crystallize a well-defined vision for their lives, they were enticed into a vicious cesspool of debt, which they are now likely to regret for the rest of their lives.

1. Debt Consolidation

Debt consolidation basically involves combining multiple debts into one single loan that will be payable to a third party monthly. The new challenge now will be how to settle with the new creditor, but the advantage of debt consolidation is that you will have only one debt to clear as opposed to having multiple debts to deal with.

Additionally, you could negotiate for a lower interest rate, though this will potentially prolong the payment period of your loan. Bear in mind there will be upfront fees that the debt consolidators will charge for this service. Also, note that your credit report will reflect a statement that you had third-party assistance.

It is recommended that you engage with your credit card supplier first before going for debt consolidation. To do this, begin by making a list of all your credit cards and include the balance owed, the interest rate and the minimum payment.

Place the highest balance and the interest rate at the top of the list. Then starting from the uppermost on your list, begin to negotiate with each credit card company for lower interest rates late fees and over-limit penalties.

Find out from your current credit card suppliers if they can agree to give you the same advantages as a debt consolidator, including a low APR (Annual Percentage Rate), in order to help settle your debt. If they agree, then you will not require the intervention of a third party.

There are a lot of offers out there by financial institutions asking people to consolidate debt credit card debt. One thing to note is that the introductory APR that is quoted (for example, 0.1%), is usually available only for a fixed period of about 9 months.

The charge on the standard APR which is long-term is different. So when you decide to consolidate the credit card debts that you have into one credit card, you must check these three things carefully:

  • The introductory APR
  • The introductory APR period
  • The standard APR

So if the standard APR (or the interest rate applied to your balance after the introductory period), is too high and you realize that you cannot be able to clear the entire debt during the low introductory period, the option is not a good one for you.

Credit card debt consolidation is quite lucrative and advantageous for the debtor. But it is also quite risky if you do not fully understand the rules of engagement.

A Word of Caution

Exercise precaution and sound judgment when navigating this field, so as to avoid digging an even deeper problem for yourself. Do your research beforehand.

Check for other fees which might not be readily obvious before getting into debt consolidation, for example, transaction processing fees. In other words, don't assume that the only payment that is due from you is what the provider specified to be the service charge or upfront fee.

Credit card debt consolidation is quite lucrative and advantageous for the debtor. But it is also quite risky if you do not fully understand the rules of engagement.

Lenders know and deliberately lure customers into situations of this nature because, just like the credit card companies, they know that they will be the beneficiaries in the end.

So learn to look beyond all the hype and attractions advertised for the debt consolidation card: zero interest rates during the first 5 months, reward points, discounts and other benefits.

Pay attention to the fine print and learn the terms and conditions of the new contract because that is exactly what it is - a new financial contract.

3. Avoid Partial Payments

One of the allurements which also makes it so difficult for people to come out of credit card debt is the fact that you can still get by simply making regular minimum payments. The general rationale is that in doing so, you avoid incurring late fees and instead only incur the interest charged upon your debt.

Again, this is just an illusion. On the surface, everything seems to be OK, but the reality of the matter is that beneath the surface, the debt is actually compounding with time. This is especially the case owing to (no pun intended!) the fact that interests charged on credit cards are much higher than other types of loans.

Since the interest charges are incurred on your credit card monthly, a new total debt amount has to be calculated each time. In other words, your interest charge this month might be higher than last month depending on the transactions that were carried out.

The partial payments you make attract a higher interest charge due to the fact that there was an outstanding previous balance, and this is then transferred to your next month's debt. So what is happening is that you are actually paying interest on the interest but you incurred last month as well.

This is how an almost insignificant debt can exponentially turn into such a massive amount that it becomes impossible to keep up with, much less pay it all back.

The reality is, just maintaining the bare minimum payment will make it impossible for you to come out of the debt situation. Ensure you are able to put in much more than that.

Try to collect the money from other sources, like your tax returns or even bonuses you have received at your place of work. The more arsenals you attack it with, the less of a monster the debt will become and the quicker you will be able to pull through.

2. Debt Negotiation

There are debt relief programs which offer benefits to the debtor. They involve professional negotiators who discuss and work out how best the debt can be reduced on behalf of the debtor.

The benefit here is that this can considerably shorten the length of time you would otherwise have to spend to clear off your debts completely. Debt management agencies have been known to reduce monthly payments by up to 60% which enables one to be debt-free within a few years.

Bear in mind that for every debt relief company out there which is legitimate, there are others bent on taking advantage and cashing in on your desperation. It is crucial to perform due diligence and research on the company in order to avoid duplicating the crisis.

Bear in mind that for every debt relief company out there which is legitimate, there are others bent on taking advantage and cashing in on your desperation.

4. Have a long-term vision

It is also important to project forward and think about your life after you have fully paid off your credit card debt. How are you going to live and what financial decisions will you be making then?

This too is also part of the challenge.

It is possible to successfully emerge from credit card debt only to enter into a worse financial situation due to wrong decision-making and uncontrolled spending. Unless the core habits are broken, this can become a lifetime dilemma.

So you need to not only focus on getting out of financial debt, but also on how to maintain that freedom once your coast is clear. Bear in mind that no solution is real until it is sustainable.

More details on how you can fight and overcome the credit card debt challenge both now and in the future are explained in the following articles:

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