We all know that carrying a balance on a credit card is a personal finance no-no.
But what do you do if you find yourself in that situation and then have a major financial setback?
Knowing that you should have handled your finances differently before you were fired or hospital stay won’t help you in the moment. Here are three concrete steps you can take to help tame the credit beast:
Note that these aren’t final solutions. You aren’t fully paying off your credit card debt by doing one of these. You are simply making the debt reduction process a bit easier and certainly less expensive. To get out of debt for good you need to bring up your income, live within your means, and build up emergency savings.
1. Transfer your Balance
If you simply need a little breathing room with your credit card bill but don’t want to rack up exorbitant interest, consider transferring your balance to a balance transfer credit card.
The benefit of this strategy is that it can buy you a little time to be able to pay off your balance without having to worry about the interest eating a hole in your budget. However, this will only work if you are able to pay off the balance before the end of the 0% promotional period.
Negotiating with your credit card company may seem rather daunting, but it’s important to remember that credit card debt is unsecured. That means that there is nothing the company can come repossess should you default—unlike with a mortgage or a car loan. So that means credit companies are generally willing to work with you as long as you are honest and open with them about your financial strain.
Before you place the call, make a detailed budget showing your income, your necessary expenses and whatever cash is left over. Then take a look at your calendar and figure out how long it will take you to dig yourself out of your current financial crisis.
With your budget and calendar in hand, call and ask to speak to a supervisor. Explain the problems you’ve been facing, and point out your positive payment history (should that be true!). Then ask for a specific change to your minimum payment. You can also ask to knock 1% off your interest rate. By calling with a specific plan and an end-date in mind, you are much more likely to get a yes from your credit card company.
If you do find yourself in a situation where you have more debt than you can handle and you cannot haggle with the company—either because you do not have the greatest payment history with them or because you can’t even swing a modified minimum payment—then you will want to contact a reputable credit counselor.
Start with your state or local consumer protection office to find someone to help you to consolidate your debt. (The ads for these services may sound tempting, but unless your credit counselor is a member of the Association of Independent Consumer Credit Counseling Agencies, you may be making yourself vulnerable to a scam).
Your counselor will work out a debt management plan with you and will negotiate with your creditors on your behalf. Once your plan is in place, you will mail your monthly check to the counselor who will pass it along to your creditors.
Unfortunately, taking this step means that your credit report will show you as “in payment” for those creditors, which will negatively affect your score. However, it is much better to be making those payments than to be delinquent.
Just because we all know what we should be doing doesn’t mean we do it. Luckily, there are always steps we can take should we find ourselves in debt and in financial trouble at the same time.
Photo by The Consumerist