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Excessive Credit Card Debt - What to Do

By - 2006

There are many things you can do to resolve your excessive credit card and other debt. The first thing though, is to stop creating more. I have seen more than one person get out of debt briefly, only to fall back into it again. So start changing those habits. Of course, you have the debt, so what can you do to knock it down? here are some ideas.

Discount Your Debt

Settle debts for a discount. When I collected debts for a living, we regularly took 50% as payment in full, if we thought it was the best we could do. If you really can't handle your payments, you may be better off to borrow the money from family to settle your debts for 20% to 60% of face value. Credit card companies regularly take 50% or less as payment in full if they are convinced you are headed towards bankruptcy.

Write a nice letter explaining your situation, and how you will get the money for the pay-off. Explain that you will most likely be filing for bankruptcy, but would like to settle up with any willing creditors before that happens. This let's them know they may be left with nothing if they say no, and you split your remaining assets between other creditors.

How to Pay Debt

If you are trying to dig out of your debt, always pay high-interest cards first. For example, if you have $200 budgeted to apply to your cards each month, pay the minimums only on all others, then put the rest of the money towards the card with the highest interest rate. Once that one is paid off, work on the next highest.

This is a powerful technique that saves a lot on interest charges. If you have three cards, for example, you would pay the minimum of (let's assume) $40 on two of them, and apply the other $120 to the highest interest card. Once that card is paid off, you continue to put $40 towards one card, and now apply $160 to whichever of the two remaining is the higher interest credit card. This is the fastest way to pay down credit card debt.

Other Tricks

Don't buy the credit card insurance. This typically stops your payments when you are injured or unemployed. It is one of the most over-priced insurances out there, and doesn't eliminate the debt, but just delays it.

Avoid credit card security insurance. It pays for unauthorized charges when your card is stolen, but you are only liable for the first $50 if you report the theft in any case, and many cards already have 0 liability.

Avoid consolidation loans. Don't consolidate debt into a home refinance unless you have a definite plan for paying the loan off early. 6% isn't cheaper than 18% when it is for 30 years instead of 5.

If you have tried some of these techniques without success, contact a nonprofit credit-counseling service. They may be able to help you negotiate lower rates with your banks, and otherwise counsel you on how to reduce your credit card debt.

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