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Illustration: Sergio
Baradat |
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Drowning in Plastic Debt
The lure of easy credit in the United States is very seductive. With the economy slow and cash tight, you need to exercise extra caution: If you are going to use “plastic,” follow these steps to make sure hard times don’t become even harder.
A Little Goes a Long Way Pay more than the minimum due. An extra $25 each month will pay off your debt much sooner than you might think. Pay Off High-Rate Debt First Review your outstanding loans, from highest rate to lowest. Determine which debt is costing you the most (with no benefit in the form of tax-deductible interest payments), then devote as much of your income and savings as you can toward paying off that highest-cost debt first.
A common mistake is keeping “emergency savings” when you have high-priced debt. A thousand dollars in credit-card debt at 16 percent interest costs $160 a year, while $1,000 in a money-market fund earns roughly 2.45 percent or $25 a year. What about needing money for an emergency? Use your empty credit cards. That's what they should be used for. Consider Consolidation Take advantage of credit-card offers that let you pay off balances at a lower rate, making sure that your new rate won’t rise after six months. Or call your credit-card issuer and threaten to switch, unless it lowers your rate. If the issuer won’t, “ask to speak to a supervisor,” says Kathleen McNally of the National Foundation for Credit Counseling (NFCC). “Just doing that will often get you what you want. If not, you can always switch into a lower-rate card.” Investigate low-rate cards at websites like www.bankrate.com. You can also lower your rate by consolidating your debt into a home-equity loan. If you consolidate $10,000 in balances that are at 16 percent interest into a home-equity loan at 8 percent, you’ll save almost $2,400 in interest payments over five years. And your after-tax savings will be even greater, because interest on home-equity loans is tax deductible. Negotiate With Lenders If your credit-card problems are serious, call the card issuer and plead for mercy. Many banks will temporarily lower monthly payments or eliminate interest charges if you can convince them that you intend to pay them eventually. “Intent means something to lenders,” says McNally. “If they believe you intend to pay, they’ll be more likely to help. That’s why it’s important to send something—anything—each month. A check for $10 can be worth far more than its face value.” Get Help When You Really Need It If an issuer won’t budge and you've no other source of funds, consult a nonprofit credit-counseling service such as NFCC. Call 800-388-2227 or visit their website to find one of the organization’s 1,450 local branches. Or contact the trade association for nonprofit credit-counseling companies, The Association of Independent Consumer Credit Counseling Agencies (AICCCA) at 800-450-1794 to locate a local member. These nonprofits are funded by the credit-card industry, therefore motivated to help you find a way to pay off your debts and less likely to suggest bankruptcy as an option. For an average of $10 per month, these credit counselors will help you draw up a budget and negotiate with card issuers (and other lenders) to lower your monthly payments. Now check out these additional articles:
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