Question: Over the past few years, I’ve racked up $85,000 in credit card debt. I had two jobs and was making $100,000 a year but once COVID hit I lost my second job and couldn’t find another that paid close to what I was making before . I joined American Consumer Credit Counseling, a non-profit counseling agency, and they asked my card companies to lower their interest rates, but I’m paying $1,837 a month, while only earning a salary of $58,000. I’ve done odd jobs, sold almost everything I owned, buy my groceries from Aldi and drive a 2007 vehicle, but I don’t think I can make it considering what I’m paying per months in credit card debt. I was living on a shoestring before COVID hit, and with the current price of gas and food, I’m barely getting by. My credit score hovers around 640 – I’ve never been in arrears and always pay more than the minimum, but my debt ratio is now abysmal. I do not know what to do. To help!
Responnse: First of all, you should be proud of yourself for getting this far in your repayment plan, says Matt Schulz, chief credit analyst at LendingTree, who also notes that you’ve probably already eliminated some of your debt. You also live very frugally and have made a useful move to lower your interest rates, which readers with high credit card debt should also be looking to do.
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So what’s the next step? For some people, tackling credit card debt could be done with a personal loan, because issuers offer rates from around 5% for those with excellent credit and other qualifications (although most people will pay more). “Personal loans are best suited for large, one-time expenses like home improvement projects and debt consolidation. The best personal loans help you achieve a financial goal like getting rid of credit card debt, but be sure to compare them with other financing options to find the right fit,” says Lending Expert Annie Millerbernd. personal at NerdWallet. But with your credit score, personal loan interest rates may well be higher than what you are currently paying.
So instead, Schulz advises you to phone your credit counselor and let them know that you are now making less money. “They need to find a way to extend that repayment period and lower their monthly payments,” Schulz says. CFP Board Ambassador Marguerita Cheng says the same, noting that existing customers enrolled in debt management programs can contact customer service and explain their situation to try to get more manageable payments. “You can provide documents to the ACC regarding your income,” Cheng explains. Because you want to pay off your debt but the proposed payment plan isn’t viable, Cheng says it’s worth mentioning to ACC that the monthly payment of $1,837 is 38% of your gross monthly income. “You can ask them to change your payment, which can extend your debt repayment plan,” Cheng says.
Something else to consider: If you typically receive a tax refund, you may want to consider your tax withholding. “Instead of receiving a windfall in the form of a tax refund, by reducing the amount of tax you withheld from your paycheck, you can have more cash flow throughout the year,” Cheng says.
And it may even be worth considering other options beyond the debt management plan, if the counselors are unwilling to work with you. “You can try to get a zero-interest balance transfer credit card and transfer your debt to it. But with your credit score, there’s no guarantee that you’d be approved for the card and if you are, the credit limit might not cover the amount you owe,” says Schulz.
Finally, negotiating a debt settlement in which the creditor allows the borrower to repay less than the total amount owed could be a feasible option. “It seems like a lot at first glance. However, it usually destroys your credit. Plus, the amount that’s given back usually becomes taxable income, so they could end up with a big tax bill later,” says Schulz.
Therefore, the best option Schulz suggests is to rework your debt management plan to better reflect the realities of their current financial situation.