More and more Americans are missing their credit card payments for so long that the banks are writing off those debts as losses.
What are called “credit card charge-offs” in the industry are increasing at the fastest rate since 2009 when we were right in the teeth of the Great Recession.
Here’s the deal on charge-offs: The banks won’t charge your debt off until it goes unpaid for 180 days, per the IRS. But once they do, this is not a get out of jail free card for you!
You’re still responsible for making good on the debt. So while it may sound in theory like both you and the bank wash your hands of the debt after a charge-off, nothing could be further from the truth.
Delinquent debts will sit on your credit report for seven years, ruining your credit score and causing you to pay higher interest rates to borrow money — if lenders will even touch you.
Meanwhile, so-called “zombie” debt collectors can buy up old and expired debts and create a real headache in your life. They’re known for hounding people to pay up on old debts that are legally past the statute of limitations and that may in fact not even be your debt to begin with!
So if you’re struggling with unpaid debts, we’ve got a formula to help you get your life back on track…
Struggling to get out of debt? Try this
Moody’s Investors Service reported June 8 that many of the biggest lenders in the country are seeing rising rates of people not paying their credit card bills vs. 2016.
- Synchrony Financial – +5.4% (was 4.84% last year)
- Capital One – +5.31% (up from 4.23% since 2016)
- First National Bank of Omaha – +4.21% (up from 3.5%)
- Discover Financial Service – +2.83% (0.48% higher than last year)
- JPMorgan Chase & Co. – +0.32%
- Bank of America Corporation – +0.03%
If the prospect of facing your credit card debt on your own seems daunting, the first thing you need to do is get some professional help.
The National Foundation for Credit Counseling (NFCC) offers free or low-cost debt counseling to help you through the process. Visit them at NFCC.org or call 1-800-388-2227 to find a local affiliate office near you.
Once you’re ready to tackle that debt, here’s a strategy for you:
1. Freeze your credit card – literally
To really pay down your debt, you’ve got to stop piling on the charges!
Money expert Clark Howard has long recommended freezing your credit card in a block of ice. Fill a large freezer bag (generic brand, of course) with some water, drop your card in and toss it in the freezer.
By doing this, you’ll cut down on impulse purchases and learn to live less and less on credit with each passing day.
Read more: Does freezing a chip credit card destroy it?
2. Pay down your debts in the right order
Once you’re no longer making new charges, it’s time to face your debt head-on.
If you have several cards, your first goal is to pay off the card with the highest interest rate. Just make minimum payments on cards that have the lower interest rates, until the card with highest-interest debt has a zero balance. Then you move onto the next card, and so on and so on.
One by one, the cards will start falling off your balance sheet as you pay them off.
3. Don’t fall for “skip a payment” offers
Particularly around the holidays, some banks and other credit issuers will let you skip a payment. But you don’t really skip the payment; it’s just tacked on at the back end of your outstanding balance due. So it gains additional interest and keeps you in the red even longer.
4. Use the 14-day method to your advantage
One proven way to pay more toward the card with the highest interest rate — and to get rid of it faster — is to make a separate half-payment every 14 days to the credit card company.
Mark your calendar every 14 days and write that check or send your online payment that day. Making a half-payment every 14 days equals one extra month’s payment you’ve made toward your debt by the end of a full year.
Be sure to work these bimonthly payments around your statement cycle to avoid paying late fees.
5. Do a hardship debt-management plan if all else fails
The NFCC mentioned above can also help you set up what’s called a hardship debt-management plan (DMP).
In the case of a hardship DMP, lenders agree to modify the terms and conditions of their repayment policies. That means they may waive late and over-the-limit fees, in addition to reducing interest rates.
They will not, however, agree to a reduction of your outstanding balance. But it could be worth a look if you meet the eligibility requirements. Get in touch with a local affiliate of the NFCC today to find out.
6. Don’t close your credit cards when you’re done with debt
The temptation when you’re debt free is to rid your life of credit cards forever. Many people want to call up their credit card companies and shut down the cards. But that’s a bad idea.
If you go that route, you reduce the available credit you have in your life, which drops your credit score. The better plan is to keep your cards open, make a small charge every six months and pay it off in full. By doing that, you’ll boost your credit score over time.