Question: Over the past few years, I have accumulated $ 85,000 in credit card debt. I was working two jobs and making $ 100,000 a year, but once COVID hit I lost my second job and couldn’t find another that pays roughly what I was making before. I joined American Consumer Credit Counseling, a nonprofit counseling agency, and they asked my card companies to lower their interest rates, but I’m paying $ 1,837 a month when I don’t earn than a salary of $ 58,000. I did odd jobs, sold almost everything I owned, buy my groceries from Aldi and drive a 2007 vehicle, but I don’t think I can do that considering how much I pay per month in debt. credit card. I was living on a budget before COVID hit, and with the current price of gas and food I’m barely getting by. My credit score hovers around 640 – I’ve never been overdue and always pay more than the minimum, but my debt-to-income ratio is now appalling. I have no idea what to do. To help!
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Reply: First off, you should be proud of yourself for going this far with your repayment plan, says Matt Schulz, chief credit analyst at LendingTree, who also notes that you’ve probably already wiped out some of your debt. You also live very frugally and have done a helpful move to lower your interest rates, which readers with high credit card debt should also be looking to do.
So what’s the next step? For some people, tackling credit card debt could be done with a personal loan, like issuers offer rates from around 5%. “Personal loans are best suited for large one-time expenses like home improvement projects and debt consolidation. The best personal loans help you reach a financial goal like getting rid of credit card debt, but be sure to compare them with other financing options to find the right solution, ”says Annie Millerbernd, loan expert. staff at NerdWallet. But with your credit score, personal loan interest rates may well be higher than what you are currently paying.
Instead, Schulz advises you to call your credit counselor and let them know that you are now making less money. “They need to find a way to extend that repayment period and reduce their monthly payments,” says Schulz. CFP Board Ambassador Marguerita Cheng says the same, noting that existing clients enrolled in debt management programs can contact customer service and explain their situation to try and get more manageable payments. “You can provide documents to the ACC regarding your income,” Cheng explains. Because you want to pay off your debt but the proposed payment plan is not viable, Cheng says it’s worth telling VAC that the monthly payment of $ 1,837 is 38% of your gross monthly income. “You can ask them to change your payment, which can extend your debt repayment plan,” says Cheng.
Something else to consider: If you typically receive a tax refund, you may want to consider your withholding tax. “Instead of receiving a windfall in the form of a tax refund, by reducing the amount of taxes you withheld from your paycheck, you can have more cash flow throughout the year,” says Cheng.
And it may even be worth considering other options beyond the debt management plan if the advisors are unwilling to work with you. “You can try to get a zero interest rate balance transfer credit card and transfer your debt to it. But with your credit score, there is no guarantee that you would be approved for the card and if you are, the credit limit might not cover the amount you owe, ”says Schulz.
Finally, negotiating a debt settlement in which the creditor allows the borrower to repay less than the full amount owed might be a possible option. “It looks like a good deal at first glance. However, it usually destroys your credit. Plus, the amount that’s written off usually becomes taxable income, so they could end up with a big tax bill later, ”says Schulz.
Therefore, the best option offered by Schulz is to rework their debt management plan to better reflect the realities of their current financial situation.