Anyone can become overwhelmed by credit card debt. The average credit card debt today is over $6,000 per family, and while it represents a higher debt-to-income ratio among those with lower incomes, carrying a credit card balance month-to-month is something even well-off families do.
Credit card debt may be leftover from a period of unemployment or illness. It can be the result of divorce expenses, medical costs, overspending, emergency expenses, and rising daily expenses. There are so many reasons people wind up borrowing money they can’t pay back immediately that it would be impossible to narrow it down to one cause.
No matter how you get into it, the biggest problem with credit cards is that they are an easy way to borrow more than you could reasonably be expected to pay back. High limits and easy applications make debt an attractive option when money gets tight.
When you’re in over your head, there are several ways you can get free of credit card debt, each with its own pros and cons.
Debt Consolidation Programs
Debt Consolidation Programs allow you to roll all of your credit card debts (and other unsecured debts, like bills, payday loans, etc.) into one simple, easy-to-manage payment. You’ll work with a certified credit counsellor with a non-profit credit counselling agency to negotiate lower or eliminated interest rates with your creditors.
The best part of a Debt Consolidation Program is that anyone can do it. You don’t have to apply for a loan, which can be a trap if your credit score has been damaged. People seeking debt consolidation have often damaged their credit score through:
- Late payments
- High credit utilization ratios
- High debt-to-income ratios
- Accounts going to collections
The result is that their debt consolidation loan is offered at a higher rate, and it doesn’t provide any meaningful help. It’s much better to go with a program that focuses on reducing interest rates.
Bankruptcy is a last resort for those who can’t afford to keep up with their debt payments. When you file bankruptcy, you’re discharged from your unsecured debts, including credit cards, but it comes at a cost.
Your creditors can recoup as much of their costs as possible from your assets. You could wind up having to give up:
- Home equity beyond an exemption limit;
- Vacation or investment properties;
- Second vehicles;
- Surplus income for a period of time;
- Windfalls such as an inheritance.
Bankruptcy will also stay on your credit report for years to come, though how long depends on where you live. That can make it harder to borrow in the future and hinder your ability to qualify for a mortgage.
Depending on where you live, this alternative can go by various names: a wage earner’s plan, Chapter 13, or a consumer proposal. Like a bankruptcy, you can be discharged from some of your debt, but you agree to a repayment plan to pay as much of it as possible.
It protects your assets, but it will be on your credit report for a long time. If you can negotiate reduced or eliminated interest rates on your credit card debt without having to go through this process, you can wind up in a stronger financial position and be ready to pursue your future dreams sooner.
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