Credit Card Debt Reduction
- Last Updated: Monday, 25 January 2021
As of July 2020, statistics published by the Federal Reserve indicate Americans have about $985 billion in outstanding credit card debt. That works out to around $7,660 per household.
Credit Card Debt
The impact of this debt on consumers is widespread. Nearly 2.5 million Americans will seek the help of credit counselors this year, while 772 thousand individuals filed for bankruptcy protection in 2019.
Reducing credit card debt takes discipline and the process below can help individuals to eliminate or lower the amount of money owed others to a financially responsible level. This process moves through a series of steps; each one should be considered more aggressive than the previous.
Budgets and Budgeting
The first thing all families need to understand is the flow of money into and out of their household each month. If credit card debt is growing, and bank accounts are shrinking, then it's obvious this pattern cannot go on indefinitely. Going through the budgeting process will help individuals to better understand how to balance their finances. This site contains three different articles on this topic:
- Budget Worksheets: walks through the process of creating a budget, leveraging a high-level template available for download.
- Family Budget Basics: uses a slightly different approach, and allows end users to compare their budget to that of an average American family.
- Household Budget Basics: provides additional hints on creating a viable budget that can help individuals to get their credit card debt back under control.
- Essential Expenses: are those costs people need to survive: food, clothing, and shelter. They also include costs that are required to generate income. For example, gasoline is essential when it's used to transport someone to and from work.
- Discretionary Expenses: are those costs that are "optional;" they make life more enjoyable. Discretionary expenses include entertainment, eating out, lavish vacations and expensive cars, clothing, or jewelry.
With the growing problem of consumer credit, there has been a steady increase in companies providing credit counseling services. These counselors will help families to develop a household budget, and educate individuals on the basics of home economics. Reputable credit counselors can be found through the National Foundation for Credit Counselors, or NFCC. Member agencies are accredited by the Council on Accreditation (COA), which ensures the highest standards are maintained as a nonprofit credit counseling agency.
Social workers can help individuals that have debt problems due to a social situation that affects the income earners in a household. Credit counselors should be able to help with this problem too, by making arrangements to get in touch with a social worker. Many times, changes to family structure or illnesses are at the heart of runaway credit card problems.
The rules for debt negotiation are fairly simple. Individuals need to be honest when working with credit card companies or any other creditor. Companies have to understand the alternative to reducing what is owed them may be declaring bankruptcy. If they think they will eventually get paid, they have no incentive to forgive any portion of someone's debt.
Oftentimes debt negotiation is a service offered by credit counselors. Keep in mind the members of a credit card company's collections department are trained in negotiating deferred payment arrangements. They've heard the same excuses many times over. The best option is to establish a deferred payment arrangement that allows the debtor to successfully pay their bills each month. This really is the goal of both parties involved in these negotiations.
Consolidating money owed on multiple credit cards is an approach that works well for many individuals. This is especially true if they've been through the budgeting process, and now understand how to stay out of debt in the long-term.
Consolidation is the process of taking certain types of debt, such as credit card balances, and turning them into a long term loan. It's important to understand that debt consolidation turns credit card balances, which are unsecured loans, into a secured loan. This means debt consolidation involves using an asset, such as a home, as collateral on the loan. If the borrower stops repaying their loan, they could lose their home.
Debt Consolidation Calculators
This website publishes several online calculators that can help individuals run through various scenarios to see how a debt consolidation loan may be able to help relieve their financial burden each month. There are also tools that can help create a plan to lower card balances, including:
- Credit Card Payment Calculator: determines minimum monthly payments based on the outstanding card balance and the agreement's APR.
- Credit Card Payoff Calculator: allows users to determine exactly how much they need to send each month to pay off their existing credit card debt.
Declaring bankruptcy should only be considered when all other alternatives have failed to produce the desired outcome. Bankruptcy is the end of the line; that's why it is the last option listed. Once in this process, individuals can lose their home to foreclosure, and may still have to pay down some credit card debt as part of the settlement. Credit reports will be impacted, credit scores lowered, and that makes getting a loan in the future much more difficult.
Anyone that wants to learn more about this process can find more information in our article dedicated to the topic of: Bankruptcy. Finally, declaring bankruptcy is a legal matter; consulting an attorney is highly recommended for any, and all, matters involving the law.
Debt Elimination Scams
If someone has a lot of debt, the last thing they need is to fall prey to someone that is going to hustle them out of even more money. Unfortunately, victims of these scams often have their good judgment clouded by their dire financial situations.
The Internet Crime Complaint Center was established as a partnership between the Federal Bureau of Investigation (FBI) and the National White Collar Crime Center. Anyone that believes they're a victim of a crime involving credit card debt is encouraged to report the incident to the IC3 Website.
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