As of December 2013, Americans collectively owe $856.8 billion in credit card debt. The average household credit card debt is just over $15,000. Debt collection is big business, but that doesn’t mean you are powerless. There are a few things you need to know to navigate your way out of debt as quickly as possible.
First and foremost, you want to work directly with creditors before they sell your debt to a collection agency. Creditors are more likely to be flexible when it comes to negotiating repayment plans or reducing your payoff amount because they have an interest in your future business. Conversely, collection agencies are driven solely by the commission they receive for the debt collected. Thus, they are known to be highly aggressive and frequently rude.
If you are struggling to pay off your credit card debt, it will be helpful for you to examine how you got to this point in the first place. Acknowledging where you are and confronting what lies behind your spending behavior head-on is an important step toward a full financial recovery. Next, create a short-term plan and identify your long-term financial goals. Use these steps to take control of and responsibility for your situation:
- Damage control — Is there anything that you can do to reduce the amount you owe immediately? Are there items, such as clothes in your closet with the tags still on them, that you can return to reduce your overall debt? Do you have items to sell in garage sales, or on eBay or Craigslist? How can you reduce spending to divert more of your monthly income towards paying down your debt?
- Keep a calendar — Pay as many of your bills on time each month to avoid unnecessary damage to your credit score. Set up automatic reminders and schedule payments online.
- Start small — If all you can do is pay the minimum amount due each month, do it. This will at least allow you to remain in good standing with your creditors. If you can afford $5 more, then do it. Do your best to pay off the smallest balance first and work your way up to the largest. Not only will this psychologically make you feel empowered over your debt by reducing the number of accounts you owe on, but financially it will also help you to build momentum. With each debt you pay off, you will have more to apply to the next largest balance, while you continue to stay current by paying the minimums on others.
- Dream big — Create a long-term plan to wipe out your debt by creating a budget and tracking every cent of your income until you have paid it off. Determine what is feasible in terms of generating extra income to speed up the process. The faster you eliminate your debt, the faster your credit can be repaired, and the sooner you will be able to make better use of your money, such as purchasing a home or saving for your retirement. Keep reminders of these financial goals inside your wallet to remind you of your own personal end game each time you feel tempted to buy that over-priced latte.
- Borrow well — If possible, borrow an interest-free loan from a friend or family member to pay off your debt to avoid any damage to your credit score. However, treat this as you would any other good business transaction. Write up a contract that outlines how you intend on paying back this loan. Make good on your promises and stay in constant communication on your progress. They may not care or even expect you to pay them back, but keep your promise anyway and don’t stop until you have paid in full. Friends and family are the most important relationships in your life. If you simply are not comfortable borrowing from friends and family, that is perfectly understandable. Only you can make this judgment as to how money might negatively affect these relationships.
Another solid option is to tap the equity you may have built-up in your home with a home equity loan. This type of loan will carry a far lower interest rate than revolving debt, while furnishing the added benefit of tax-deductibility on all the interest you pay. (Up to $1 million in loan amount.) Clearly, an interest-free loan would be preferable. But if you can’t swing that, try a home equity loan.
If you have created your long-term plan using the steps above and you still have creditors contacting you by mail and incessant phone calls because you are behind on payments, then you will need to implement the next set of steps to minimize the damage to your credit.
- Check your credit report — Determine which debts are hurting your credit the most. Also, check for any inaccuracies and dispute any and all mistakes to the three major credit bureaus (Equifax, Experian and TransUnion).
- Strike a balance when it comes to your financial information — Communication with your creditors is a crucial part of avoiding collection agencies, especially if you are experiencing economic hardship. Documenting things such as chronic illness or a disability that has resulted in a reduction in income, and preventing you from making payments, for example, are good to communicate personally in writing to your creditors. However, when speaking on the phone with creditors, do not give away any information that is not necessary as part of the repayment plan negotiations. The creditor may attempt to counter with repayment terms that are more than what you can afford. Keep as much control over your finances by focusing only on what you can afford to pay.
- Keep calm and negotiate on — Remember that creditors will employ any means possible to recover what is owed to them. These individuals are professionally trained to use a number of tactics with you. These might include using legal terminology to confuse and intimidate you. Try to identify a single individual at each creditor and insist on communicating directly with them in writing, especially if you are not comfortable negotiating on the fly over the phone. If the creditor refuses, ask to speak with the supervisor, or keep calling until you find someone who has the authority and is willing to personally work with you—and even better, someone who appears to be empathetic to your financial situation.
- Lump sums trump monthly payments — Whenever possible, negotiate a repayment plan where you agree to pay a percentage of your total debt in a single lump sum, aiming between 50 and 70% of the total owed. This will give you more negotiating power. Know what your limits are and go for it. Ask to speak with managers and supervisors until you reach the agreement you want, in writing and fully executed prior to making your payment. If you do not get the deal in writing, creditors could come back with fees and interest charges, negating any headway you made on negotiating the balance.
- Become your own credit spin-doctor — Creditors have some flexibility when it comes to reporting negative information to the credit bureaus. For example, if you agree to pay a percentage of the total debt owed in a single lump sum, you will also have more leverage to have them remove negative statements from your credit report. Keeping records of your payment history with each creditor will be useful for this negotiation — information such as how long you have been a customer with the creditor, or how long you have been making payments on time will be important factors with how they report your information. By playing an active role in negotiating what they report, you can reduce damage on the back end. This is yet another reason to maintain a positive relationship with your main contact at each creditor, documenting how you have stuck to your repayment plan, or if not, why.
Approach your debt as though you were trying to win a big new sales account — because you are. Your personal financial goals are that big account. Be persistent with creditors, but remain as patient and professional as possible. Throughout the process, be sure to take care of your health by exercising regularly and maintaining a proper diet. In a 2007 survey by the American Psychological Association, 73% of respondents identified money as a top source of stress. Because financial stress can lead to high blood pressure, heart attacks and other serious medical conditions, it is important to maintain a positive attitude and a proactive stance on your short- and long-term financial goals.
If you want to settle outstanding debts for less than what you owe, try our debt settlement tool.