Unless you win the lotto, you need a plan
By Todd Ossenfort
| The Credit Guy | |
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Dear Credit Guy,
I have a total of $12,000 in credit card debt (five different accounts). I'm current on my payments, paying a little more than the minimum payment. I just feel like it's going to take me forever to pay off the balances on my accounts. Is there any way I can be debt-free sooner without hurting my credit and combining all those account balances into one so I can easily make one easy payment (within my budget) instead of five? I read about debt settlement and that is not the option I want to go due to the fact that it'll hurt my credit. Thanks. Hope to hear from you soon. -- Mey
Dear Mey,
You are absolutely right that debt settlement will hurt your credit. Not only that, but settling with your creditors after you are more than 180 days late is something you can do yourself without the help of a debt settlement company that will charge you a hefty fee. Saving your credit rating and paying what you owe is a much smarter route, especially considering creditors are not the only ones making decisions based on your credit rating. Your insurance company, employer, future employer and landlord may also be. Plus, any savings you realize from settling for less than you owe could have income tax implications .
I hear your frustration about seemingly taking forever to pay your $12,000 debt. One thing to keep in mind is that it's likely you did not rack up the debt quickly and unless you hit the lotto, it won't get paid off quickly. It may, however, be paid quicker than you think. Right now you are paying "a little more than the minimum payment." If you continue to make the payments that you made this month, which for the sake of argument let's say was 3 percent of your balances or $360 plus $40 for a total of $400, you will pay off your balances in 36 months or three years.
Let me clarify some things -- the pay-off period of three years assumes that you keep making a $400 payment each month, do not add any purchases to your balances, your interest rate is a reasonable 12 percent and you won't miss any payments that may drive up your interest rates. If any of these don't apply, then your pay-off period will be slightly longer.
Many people know it will take 10 years or more to pay off their credit card balances if they are making only minimum payments. What many people don't know is the key to paying off the debt in a reasonable time frame -- three to five years -- is to continue to make the same monthly payment consistently until the balance is paid. It only takes much longer when you pay only the minimum due required by the card issuer. The minimum payment decreases on your statement as your balance decreases, but if you continue to pay the same consistent monthly amount without lowering it, paying off the balance will take much less than 10 years.
In answer to your question regarding making one payment, you could contact a non-profit credit counseling agency (affiliated with the Association of Independent Consumer Credit Counseling Agencies or the National Foundation for Credit Counseling) in your area to determine if a debt management plan (DMP) would be in your best interest. Depending on your current interest rates, a DMP may save you some money and you would make one payment to the agency that would then disperse the money to your creditors. One thing to keep in mind with a DMP is that your accounts are closed and you no longer have access to them.
You might also consider setting up automatic payments to your creditors with online banking. This would ensure that your payments are made on time and you would only need to set it up the one time and just monitor it to assure everything is getting paid as you wish.
Take care of your credit!
