Credit Card Debt - What Are You Options?

It is easy to get into credit card debt. That is probably why you are here right now. If it makes you feel any better, you are definitely not alone. Almost half of American families spend more than they earn.

Recent unemployment levels have made it difficult for many people to make their credit card payments. Medical expenses account for about 30% of low to middle income families credit card debt.

The Federal Reserve reported that the total outstanding credit card debt at the end of August 2009, was $899 billion. Like we said, you are not alone and you probably need help with your credit card debt.

Why should you be concerned about your credit card debt? Well, here is an example of what you might be facing: If you have $10,000 on your credit card with an 18 percent interest rate and make only the minimum monthly payment, it will take you 32 years to pay it off at a total of $24,834. That doesn't include over-the-limit charges or late fees. That is why you should be concerned about your credit card debt.

What are your options to get out of credit card debt?

It is important that you research your options before you get too far behind with your credit card debt. A good place to start is with a reputable credit counselor. Before you make that contact, you should make sure you are familiar with your options.

Take Care of it Yourself - If you are only several thousand dollars in debt on a few credit cards, you can call the issuer of the credit card and ask if they have a repayment plan for people facing financial hardship. The credit card company may be willing to help you. It may result in reducing your credit limits to your current balance.

Many people are afraid to call their creditors, but they are the first ones that you should contact regarding your financial difficulties.

Credit Card Consolidation Loan - You if have outstanding balances on several different credit cards with high interest rates, then you might want to consider a credit card consolidation loan. A credit card consolidation loan can pay off all of your credit cards in one stroke, giving you the immediate debt help you need. It is true that you can never borrow your way out of debt, but at least you are able to lock in a much lower interest rate. This can help to put you back on the right track.

Contact a Financial Counselor - If you are deep in debt or your debt is spread accross many different credit cards, you should talk with a financial counselor. A credit counselor can review your entire financial situation and determine the best way to proceed. It may be as easy as setting up a payment plan that you can handle by yourself.

When you choose a credit counselor, make sure they are associated with a professional credit counseling organization. Their fees should be reasonable to set up a debt management plan, about $50, they should be willing to spend at least an hour with you, and they should not turn you away if you can not afford the fee.

Debt Management Plan - A credit counseling agency will be able to determine if this plan will work for your situation. This is how they work: the credit couseling agency negotiates a lower payment and interest rate with your credit card companies, to an amount that you can afford. All over-the-limit and late fees stop. You will then make a single payment to your credit counseling agency, and they distribute the payment to all your creditors. The counseling agency usually charges you a fee of about $25 per month. Most plans take last for three to five years, and after that your existing debt will be paid off.

With a debt management plan, your balance isn't reduced, but your interest rates do go down significantly. In some cases, interest rates can drop from 30% down to 10%, and that does make a big difference in paying off your credit card debt.

Using a debt management plan should not hurt your credit score, but it could. It all depends on how your creditor reports it to the credit rating agencies. Your priority should be to get out from under your credit card debt and your credit score will eventually improve.

Debt Settlement - You should be very careful when you consider working with a debt settlement company. The are an option, but they should not be your first contact. You may not be able to afford paying off the full amount of your credit card debt through a debt management plan and you don't want to file for bankruptcy. Working through a debt settlement company might the right option for you.

When you sign up with a debt settlement company they usually require that you pay a sizeable fee at the beginning. Another option is that they may charge you a percentage of the amount they saved you. The typical advise that you get from a debt settlement company is to stop paying your debts and to put your money into a seperate account on a monthly basis for two to three years. Eventually, that sum will be used to negotiate a settlement, which usually averages about 60 percent. Though, in the meantime, the credit card companies continue to charge you late fees and interest. The creditor might sue you, your phone will continue to ring, and your credit score will go down.

There might be good debt settlement companies out there, but their basic business model does not work well for you, the consumer. A lot of creditors will not work with debt settlement companies. Remember, you should take the time to research your different options before you commit to any plan to get rid of your credit card debt.

Bankruptcy - Depending on your situation, it might be worth considering talking to a bankruptcy lawyer, where the initial consultation should be free. A bankruptcy lawyer can advise you of your rights and discuss the many pros and cons of filing bankruptcy. It may not be a bad idea if you are under a lot of financial hardship and you are afraid of losing your assets. It is also smart to meet with a credit counselor and a bankruptcy attorney before you consider debt settlement.

You also need to have a good understanding of how to properly use credit cards and how to pay off your credit card.

Credit Card Use - The most important step in choosing a credit card is thinking about how you will use it and how you will make your credit card payments.

If you expect to pay your credit card monthly bill in full, and other features such as frequent flyer miles don't interest you, your best choice is probably a credit card that has no annual fee and offers a long grace period.

If you carry over a balance from month to month, you may be more interested in a low interest rate credit card that carries a lower interest rate (stated as an annual percentage rate, or APR).

If you expect to use your credit card to get cash advances then you will want to look for a credit card that carries a lower APR and lower fees on cash advances. Some cards may charge a higher APR for cash advances than for purchases.

In order for you to understand how credit cards are used and to know how to avoid making financial mistakes with your credit cards, you need to know some of the basic credit card terms.

APRs - The annual percentage rate or APR is the way of indicating the interest rate you will pay if you carry over a balance, take out a cash advance, or transfer a balance from another credit card.

A credit card may have several APRs:  One APR for purchases, another for cash advances, and another for balance transfers. The APRs for cash advances and balance transfers often are higher than the APR for purchases.

Tiered APRs represent different rates that are applied to different levels of the outstanding balance.   A penalty APR is when the APR may increase if you are late in making payments.  An introductory APR is often temporary and a different rate will apply after the introductory rate expires.  A different rate will apply in the future if you choose a delayed APR.

If you carry over a part of your credit balance from month to month, even a small difference in the APR can make a big difference in how much you will pay over a year. Try the Credit Card Payoff Calculator using different APRs to see the change.

Fixed and Variable APRs - Some credit cards are "fixed rate" or simply state that the APR doesn't change, or at least doesn't change very often. Even the APR on a "fixed rate" credit card can change over time. However, the credit card company must notify you before increasing the fixed APR.  

Some credit cards are "variable rate" in that the APR changes occasionally. The rate is usually tied to another interest rate, such as the national prime rate or the Treasury bill rate. If the prime rate changes, the rate on your card could change and you may pay more.

Look for information on the credit card application and in the credit card agreement to see how often your card's APR may change on an annual or monthly basis.  

Grace Periods - The grace period is the number of days you have to pay your bill in full without triggering a finance charge or penalty. For example, the credit card company may say that you have 30 days from the statement date, provided you paid your previous balance in full by the due date. The statement date is typically given on the monthly bill. 

The grace period typically applies only to new purchases. Also, most credit cards do not give a grace period for cash advances and balance transfers. Instead, interest charges start immediately. It is important to learn how the finance charge on your credit card is calculated.

Minimum Finance Charges - The finance charge is the dollar amount you pay to use a company's credit. The amount depends in part on your outstanding credit card balance and the APR.  Finance charges can be calculated over one billing cycle or two, using the adjusted balance, the average daily balance, or the previous balance. 

Most credit cards have a minimum finance charge. You'll probably be charged that minimum even if the calculated amount of your finance charge is less.  A minimum finance charge usually applies only when you must pay a finance charge and that is when you carry over a credit card balance from one billing period to the next.

Hidden Fees - Almost all credit cards charge fees under certain circumstances.  Annual fees are common (sometimes billed monthly).  Some have a fee charged when you use the card for a cash advance.  This may be a flat fee or a percentage of the cash advance. 

A balance transfer fee is commonly charged when you transfer a balance from another credit card.  Your existing credit card company may send you checks to pay off the new card. The balance is then transferred when you use one of these checks to pay the amount due on the other card. 

Late payment fees are charged if your payment is received after the due date.  Over the credit limit fees are charged if you go over your stated credit limit.  A set up fee is charged when a new credit card account is opened.  A return item fee is often charged if you pay your bill by check and the check is returned for non-sufficient funds.

Credit Limits - The credit limit is the maximum total amount for your purchases, cash advances, balance transfers, fees, and finance charges that you may charge on your credit card. If you go over this limit, you may have to pay an "over the credit limit fee."

Credit Card Default - To understand credit card default, you need to know what that term means. In the world of credit cards, default means that you failed to make a required minimum payment before your bill was due. That can be bad for your credit rating, but it isn't as bad as a charge-off.

Credit card companies can put you in default status within days of missing a payment, but most credit card companies wait 60 days before putting you into default status.

Defaulting on your credit card can cost you lots of money. You will be required to pay the late fee, usually about $40. Worse than that, your interest rate will jump to the "default" interest rate for up to 12 months and that rate can be over 30%!

What should you do about credit card default? Well the first thing is to pay your bills on time. You also might want to check into a credit union for the future. Federally chartered credit unions have a legal maximum interest rate of 18% and that sure beats the 30% that credit card companies might end up charging you.