As a practicing consumer bankruptcy attorney in Atlanta, Georgia for over 25 years, I know that out of control credit card debt can force people in to Chapter 7 or Chapter 13 bankruptcy. In many cases credit card debt that was manageable becomes unmanageable because of common mistakes made by individuals in how they handle their credit card debt.
If you can avoid these mistakes you may be able to avoid the stress and financial distress caused by excessive credit card debt.
How Credit Card Debt and Credit Card Interest can Get Out of Control
The first step towards controlling your credit card debt involves your spending. This may seem obvious but many of my bankruptcy clients fail to recognize this reality. If you find yourself carrying a balance (rather than paying off your debt in full at the end of the month) you need o change your usage habits. If you carry a balance you will end up paying unnecessary and expensive credit card interest.
Your credit card is not a substitute for cash – instead your credit cards represent a high interest loan with a 20 days repayment term. Interest on unpaid balances will eat you alive. Most cards obligate you to pay an 18 to 20% annual interest rate on balances carried more than 20 days. To give you some perspective, your interest rate on mortgage debt will end up in the 3 to 4% per year range, and the annual percentage rate on your car note will generally be 5 to 6% per year.
As a rule, if you make only the minimum payment, your balance will stay the same, or actually increase month to month indefinitely. And if you are 1 day late, you will likely get hit with a penalty (often $35 or more) plus your interest rate may be increased to 28% or higher.
Banks earn huge profits from consumers who consistently maintain monthly balances while making minimum payments and occasionally missing a payment deadline. I have represented numerous clients over the years whose $20,000 balances never changed despite hundreds or even thousands of dollars of payments over years and years.
Credit cards can be a convenience – you can avoid the risks associated with carrying cash. But if you do not pay your balance in full each month, that convenience becomes an expensive, high interest short term loan that can cost you thousands of dollars.
Step One – Stop Using Your Credit Cards and Create a Budget
The rule of thumb I offer to my clients is simple: if you find yourself carrying a balance for more than 2 months, stop using your credit cards. If you do not have enough money in your budget to pay your bills without accessing short term credit (i.e., your credit cards), cut out all unnecessary expenses and/or get a part time job. Step one is to stop the bleeding by balancing your household budget.
If your budget does not balance, everything should be on the table – and this includes cutting out or reducing expenses such as:
- entertainment (movies, premium cable channel)
- expensive cell phone plans
- magazine and newspaper subscriptions
- reducing your insurance coverage to get a cheaper premium
- electricity and gas by changing your thermostat and taking shorter showers
Use coupons when shopping at the grocery store and buy cheaper food items
If those steps don’t get you back into balance, then look at trading your car or even moving to cheaper housing. Yes, I am serious!
If you have not done so, allocate an hour to create a household budget. I prepare budgets in bankruptcy cases and many of my clients are shocked at how much they spend each month.
You and your family need to recognize that an out of balance budget is a huge red flag. And “Murphy’s Law” tends to mean that emergency car repair or leaky roof will appear just when you have the least amount of cash.
After 25+ years of bankruptcy practice, I can tell you that if you do not get control of your budget sooner than later, the bankruptcy court will force you to make changes and often changes that you do not want. Here is a good resource for budgeting.
Step Two – Attack Your Credit Card Balances
As you work towards making your household budget balance, you will also need to attack your credit card balances. A cheap and easy tactic I use myself involves going online and creating an automatic minimum payment draft from your checking account on or before your payment due date.
As we have seen, minimum payments won’t help pay down your balance but that minimum payment will avoid late payment fees and penalty interest rates.
You can also use your bank’s notification features to send you alerts, reminding you that your payment due date is coming up in a certain number of days. I have these alerts emailed and texted to me so I will not forget.
I also set up electronic payments from my checking account – this will allow you to pay on your balance at the last minute and avoid the risk of late payments or excess interest caused by slow mail.
Next, create a plan for yourself to eliminate your credit card debt. You can approach this in different ways. Consumer advocate Dave Ramsey has developed a debt snowball plan which advocates paying off your smallest debts first and working up to the bigger ones. Dave argues that the psychological boost of seeing a debt eliminated will encourage you to sustain your efforts.
Alternatively you can start by paying down the highest interest rate debts first and working backwards from there.
However you decide to proceed, the key here is to balance your budget, find a way to generate extra money and chip away at your debt.
What About Credit Counselors?
My experience has been that private debt consolidation companies often cause more trouble than they are worth. Many of these companies run radio and TV ads touting their non-profit status (which means nothing) and promising reduced balances and favorable payment terms.
Many of these companies have been sued by attorneys general in various states for a variety of reasons and many customers end up paying a lot of money they don’t have for very little result.
Clearpoint (formerly CredAbility or Consumer Credit Counseling) is an exception – this company and others certified by the National Federation for Credit Counseling have helped consumers (including some of my clients) with legitimate, reasonably priced credit counseling services.
While I do recommend ClearPoint, you should understand that this company is funded by credit card companies, banks and other consumer lenders. As such, ClearPoint plans are designed to help you pay your credit card debts in full, or mostly in full, with savings arising from (temporary) interest rate reductions and penalty waivers. Further, some consumer creditors will not participate in a ClearPoint plan.
Credit Card Debt Settlement
In many circumstances you can eliminate interest, penalties and fees by settling your credit card debt for less than 100% on the dollar. Generally you will need access to a lump sum of cash and the amount of your discount will depend on how far behind you are and your employment status and asset picture.
In addition to the financial considerations, you can help yourself avoid penalty interest rates, fees and credit card interest by approaching this problem with the right mindset. Creditor representatives (collection agents) are trained to use emotions against you. Representatives will suggest that because you have not paid on time that you are dishonest, or that you are at the mercy of the lender.
You should treat your credit card interest and debt issues as a business problem. This means that you should not be afraid to ask the lender’s representative to waive fees and penalties or to reduce interest rates. Remember – they want something from you – your money and they need to cooperate with you.
Do not be afraid to pick up your phone and talk to a bankruptcy attorney about your bankruptcy options. You may discover that Chapter 7 or Chapter 13 may not work at all for you – which is important to know when you formulate your plan. You may also benefit from a lawyer’s perspective – for example, I sometimes speak to potential clients who owe $10,000 to $15,000 and I generally advise these people that bankruptcy does not make sense.
On the other hand, if Chapter 7 would clearly work to wipe out tens of thousands of dollars of debt, that alternative would be helpful to have in your back pocket when negotiating with a credit card company.
The big picture here is that just because a credit card company wants to charge you fees, penalty interest rates or to increase your interest rates there is no reason why you should simply accept their desires as your reality. You have leverage and that leverage arises from your knowledge of the options available to you.
If I can be of help to you in better understanding those options, I invite you to call me at 770-393-4985, or to email me using the form on this page.