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Everybody with a credit card knows it's smart to pay what you owe at the end of every month - right? According to CardWeb.com, an international credit card tracker, the average American household had its highest debt ever in 1999, at $7,564. Projections for 2000 are even higher. Internet shopping increases the temptation to overspend, since cash or checks are rarely an option if you're online to shop.
According to Forrester Research, Inc., consumers were primed to part with $10 billion online over the 2000 holiday season. Total charges to credit cards were estimated to hit $114 billion, or 23 percent more than last year. Credit card use between Thanksgiving and Christmas was estimated to average about $1,100 per family.
It may seem like a modest sum if it's paid off in a couple of months. "But we all know that's not how the real world works," said Don Hofreiter, a sales executive with a Glendale, Calif., corporation. "Not only do people carry balances from month to month, but they continue to charge on the same card to compound their compounding interest problems."
Escaping the Debt Set isn't easy, but it's the best path toward saving and investing for the future. Besides, zero balances eliminate the stress of debt.
Salary.com researched some of the top sources on personal finance (listed below). These 12 ways to get out of credit card debt are a compilation of what the experts recommend.
1. Stop running up balances
2. Find your best offer
Alternatively, hold on to every solicitation you receive (1 billion are sent out each year). Look for the best introductory rates, perhaps six months at 5.9 percent or lower, and consider transferring all your balances to the new card.
"You need to be extra careful with these offers, though," said Dave Demers, a planning consultant from Anchorage, Alaska. "They usually charge a 1 percent transfer fee or $50, whichever is less. But if you're transferring from several cards, you can get the $50 hit for each card.
"Also, know what your interest rate will switch to after the promotional period ends. Be sure it's not higher than the one you're switching from. If, after six months, you want to switch cards again to take advantage of another introductory offer, be certain you won't fall subject to a special penalty," Demers said.
Credit card companies protect themselves against card hopping by restricting terms on introductory rates. Sometimes they apply only if total balances are paid off within the promotional period, or worse still, kept with that bank for at least 12 months. If neither of these provisions is satisfied, you could face retroactive interest charges at the full rate the minute you transfer to another card.
3. Stop the solicitations
So, when you've settled on the one or two credit cards that will help consolidate and eliminate your debt, contact one of the three main U.S. credit bureaus and have yourself removed from all prescreened credit offer lists. They're required to notify each other of your decision. Those credit bureaus are Equifax, Experian, and Trans Union and can be contacted at www.equifax.com, www.experian.com, and www.tuc.com, respectively.
This action will also limit your risk of identity theft. Thieves can easily intercept solicitations, use their own name and address, and max out the card before you even know about it.
4. Pay more than the minimum
That minimum balance box on your statement is designed to snare you into debt maintenance so the financial services company can earn interest. Scrape together every penny you can each month and send it in.
5. Cash in investments
6. Turn to friends and family for a loan
7. Consider a home equity loan
8. If you have a 401(k), consider borrowing from it
This option has consequences if you change jobs. Usually you've only got five years to pay off the debt, and if you quit your job, the debt becomes due immediately. If you can't pay then and there the amount is treated as a distribution and you'll receive a tax bill which that include a penalty if you're under 59 1/2. The best way to avoid all of this is to ensure the loan is settled before you change jobs.
9. Renegotiate terms with your creditors
Contact your creditors and ask for a new, lower repayment schedule. You could be surprised by their reaction, particularly if this is the first time you've gotten into real trouble. You could tell them you have a preapproved offer from another bank and would like them to match the terms if they wish to keep you as a client.
If it's clear you are in debt crisis, let the banks know this is a call of last resort short of filing for bankruptcy. Creditors will do what they can to protect themselves against a total loss.
10. Consider the debt doctors
The main task of debt doctors is to contact your creditors to get them to lower your monthly payment requirements and your interest rates. Thus you're armed with a debt repayment plan that doesn't devour your entire paycheck. But you also incur a monthly fee as high as $50.
Organizations like the CCCS are actually funded by the credit industry. While they'll propose a wide range of recommendations on how to navigate your way out of debt, one of them will not be to file for bankruptcy.
11. If all else fails, file for bankruptcy
There are two types of personal bankruptcy relief: Chapter 7 and Chapter 13. Chapter 7 is straight bankruptcy, which allows the discharge of most debts except for alimony, child support, taxes, loans obtained through filing false financial statements, loans not listed in the bankruptcy petition, legal judgments against the petitioner, and student loans. While you won't have to repay most of your creditors, you may have to give up much of the property you own to help satisfy the debt.
Chapter 13 is known as the "wage-earner plan" - you keep your property, but are ordered to surrender control of your finances to the bankruptcy court. It will approve a repayment plan based on your resources that pays off all or part of your debt over a three- to five-year period. Meanwhile, there's a moratorium on creditors harassing you. No interest charges are incurred during this time, and when all provisions of the court-approved plan are met, you emerge debt-free.
12. Create a budget and live by it
Sources and further reading
Fisher, Sarah Young and Susan Shelly, The Complete Idiot's Guide to Personal
Finance in your 20s and 30s, MacMillan Distribution,
Heady, Robert K. and Christy Heady, The Complete Idiot's Guide to Managing Your Money, MacMillan Distribution, December 1998.
Bamford, Janet et al., The Consumer Reports Money Book: How to get It, Save It and Spend it Wisely (3rd ed.), Consumer Reports Books, November 1997.
Gardner, David and Tom Gardner, The Motley Fool Investment Workbook, Fireside, January 1998.
Naylor, W. Patrick, 10 Steps to Financial Success: A Beginner's Guide to Saving and Investing, John Wiley & Sons, April 1997.
Quinn, Jane Bryant, Making the Most of Your Money, Simon & Schuster, November 1997.
- Audrey Arkins, Salary.com contributor
Copyright 2000-2004 © Salary.com, Inc.
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