Your Questions About Eliminate Debts Credit Cards

Mark asks…

What is a good way to eliminate credit card debt?

i am having a very difficult time paying down the balances that I owe on my credit cards. I’ve tried calling them up myself and negotiating the interest rate, but they refuse to lower it. I can barely afford the minimum payments and just want to be done with this. I don’t want to file for bankruptcy, I’m just looking for other methods of helping me eliminate this debt that I carry. Any help would be greatly appreciated!

John answers:

I, personally, think that debt settlement or a debt consolidation loan is not a great idea. If you have an income, this plan will work for you. Just follow the steps.
Please do not consolidate or use a debt reduction company . It is not free, they will lower your payments by increasing the length of time until you are debt free, and you will take a hit on your credit score. Or they negotiate your debt down after telling you not to pay for awhile adding another hit to your credit score. Student loans are the only debt that can garnish your wages for non payment without taking you to court first. Just list them out on a piece of paper or a spreadsheet and follow the plan. If you work the plan, the plan will work for you.

A. Have a garage sale and sell anything that you no longer need or want.

B.Get a temporary part time job, if you have one, get another.

Here is a plan that can help you. If you work the plan, the plan will work for you:
1. Make a budget. Make the budget a week before you get paid. A budget is not a punishment! It is a tool which will free you from ever having to worry about money again. Put everything in your budget. Especially those annual, biannual, or quarterly bills like car registration, insurance, etc. Give every dollar you are going to bring home the name of where it is going. Add an “emergency fund” category to your budget for 25 dollars and save up until you have 1000-1250 dollars. Your emergency fund will help keep you from getting into new debt because of an emergency. If you can, set up a direct transfer to a savings account for your emergency fund. That way it moves automatically and you don’t even have to worry about it. You must cut your spending and live on less than you make.

2.First get current on all of you debts and make no more late payments. Stop using your credit cards immediately. Do not take on any more debt. Credit cards are like quicksand only the death is much slower. Make a list of all of your debts in order of highest interest rate to lowest interest. Use cash only for your spending from now on.

3.Pay the minimum due on all of your debts and then put your extra money towards paying off the highest interest one first. After you get that one paid off, you put the money you were paying on debt #1 (the minimum payment and the extra payment) towards debt #2. That will pay debt #2 off faster. When that is paid off, you put all three payments towards card #3 and that one will be paid off pretty quickly. As an example:

To start :
Debt #1 (highest interest): minimum payment+ extra payment
Debt #2 (middle interest): minimum payment
Debt #3(lowest interest): minimum payment

Debt #1: paid off
Debt #2: minimum payment from Debt #1+ Minimum payment from Debt #2 +extra payment
Debt #3: minimum payment

Debt #1: paid off
Debt #2: paid off
Debt #3:Minimum payment from card #1+ minimum payment from Debt #2+ minimum payment from Debt #3+ extra payment.

That way, you will get them all paid off, on time, and pay the least interest. It will also help towards rebuilding your credit since you will no longer have any late payments. This works no matter how many different debts you may have.

4. After you get all of your debts paid off, add to your emergency fund until you have 6-12 months of income saved up. Put that emergency fund money into a liquid money market fund or into a Bank of America no-risk CD so that if you need the money you can take it out without penalty.

5a. When you have your emergency fund in place, add a category for “fun” to your budget. Save for a holiday, a vacation, a big screen, or dinners out, whatever goal you want. Remember to enjoy your life.

5b. When you have your emergency fund in place, start saving for your retirement. Join the 401(k) plan at work and contribute the maximum. Your employer probably matches at least part of your contribution so why give up free money? Open a Roth IRA and contribute the maximum on a monthly basis. If you start saving for your retirement now, you will probably retire a millionaire.

5c. When you have your emergency fund in place, start saving for your next car. Only buy cars, or other things that depreciate, with cash. Save up for a nicer car. That way you get the interest instead of paying the interest.

You can do it and it isn’t as hard as you think. Just follow the plan.

Ken asks…

Consolidate debt? Too many credit cards? How can I eliminate debt with out it hurting my credit score?

Consolidate debt? Too many credit cards? How can I eliminate debt with out it hurting my credit/fico score?

Do the consolidators companies hurt your credit?

John answers:

Debt consolidation will hurt your credit. It is placed in your report when you enter a program – which indicates that you needed (or thought you needed) help.

If your not behind – just put yourself on a program and use the “debt snowball” to get out. Give yourself a timeline that gets things paid off as quickly as you can.

Just make a spread sheet with all of your balances. Make minimum payments on all but one card. Work to get that one paid off ASAP. When its paid off, work on the next one. Start with either the highest interest rate card, or the lowest balance card.

If you get offers for 0% on balance transfers, etc., transfer the balance. BUT, make sure you destroy the old card so your not tempted to use it. In fact, its a pretty good idea to just destroy the new card when you get it. You don’t want to end up in the same problem. One of the keys to getting out of debt is to not create more debt. Kind of makes sense, but many people overlook this step.

Good luck.


James asks…

Can you eliminate credit card debt by declaring bankruptcy?

Can an individual eliminate credit card debt by declaring bankruptcy? I didn’t think you could wipe it out, just get the bill collectors off your back. But, someone told me that it depends on which chapter of bankruptcy you use. The right one WILL eliminate credit card debt. I know someone who has $80,000 in credit card debt and they are trying to do that to get rid of that debt! Is it really possible? Are there any restrictions in doing this. Can you ever get a credit card again if you do it?
If you file bankruptcy to eliminate all debt, do you have to give up ALL of your possessions? Will you have anything left?
This is for a friend of mine (really). They don’t own a home. They have 2 cars and some furniture and A 401k plan. Between the two of them they make about $40,000 a year. I don’t see how debt consolidation will help them How could they EVER pay off $80,000!?! They had a house but they used up all the equity in it over the years and sold it recently and broke even on the deal, ending up with NOTHING! What a mess! I just didn’t think they could wipe out their credit card debt! And, it really isn’t fair to the rest of us that pay our bills!

John answers:

There are a number of factors involved.

A chapter 13 is where you have to pay back some of the debt. How much depends on what your current disposable income is and how much your debts total. There is a fairly complicate formula involved. But this will stop them from filing judgments, garnishments or liens. It freezes interest and late fees. And it protect your property if you own a home or car.

A chapter 7 is called “liquidation” for a reason. You may have to give up most of your property. Therefore, if you have a lot of property along with that 80k in credit card debts, you may have trouble keeping it all.

Also, you must pass a “means test”. This was put into place to prevent someone who has a very good job from filing BK and dodging their debts. If you earn (generally) over $45k a year you will not qualify for Chapter 7. Again..there is a complicated formula to figure this out.

There are a lot of bankruptcy lawyers who have a free consultation. If you think it’s necessary talk your situation over with them.

Michael asks…

Why Is It So Bad To Take A 401k Loan To Help Eliminate Credit Card Debt?

I took a loan out a few years ago to help my girlfriend get out of some financial trouble and it worked out great. I paid myself back with interest. Now I want to do the same for myself, and I hear people saying NOT to do it? If it helps me out, as I cut up my cards in the process so they can’t be used, why is it so bad?

John answers:

The main reason is because your money is not working for you in your 401K if you take it out in the form of a loan. With the market down right now, you have to redeem more shares to get the same amount of money you could take out a year ago. By the time you pay back the loan, the market might be higher, so you could be buying back your shares for a higher price.

A second reason was already pointed out to you in the previous answer. If you lost your job, the loan would become due immediately. And, if you could not pay it back all at once, you would have a premature distribution on your hands, subject to regular income tax plus a 10% penalty.

A third reason is that you might not learn how to change your spending habits, and once you pay off the credit cards with the 401K loan, you might end up running up those balances again. This is what happens to about 90% of folks who pay off their credit cards with home equity loans, so why would a 401K loan be any different?

It would be a better financial lesson for you to feel the pain of paying down your credit card balances from discretionary funds, leaving your 401K intact. It will take longer and be more difficult, and that makes it more likely you will learn a valuable financial lesson.

Whatever you decide, good luck to you! Wishing you every financial success.

Maria asks…

what is better to eliminate credit card debt?

What would show better on my credit report? Saving up and paying off the debt all at once after making a “pay to delete” deal with the credit company. Or making monthly payments to the company, therefore showing monthly payments on my report.
The account is closed, not charged off.

John answers:

Credit is important. If you want to buy a house or get any kind of loan, you have to have credit. You have to be able to show lenders that you are a good credit risk. You do this by having a good credit score. So how do you establish a good credit score without getting into debt? Simple. Get a credit card. Charge as little as $10 a month on that card. When the bill comes, PAY IT!
Pay the entire bill. What lenders want to know is, do you make your payments on time? By paying your credit bill in its entirety every month, you are establishing good credit. You are showing that you do pay your bills, and that you are responsible. That is what those interested in your credit score want to know. People who get themselves into trouble with credit cards spend beyond their ability to pay. People who think they will just buy it now and pay for it later, usually have much more to pay for than they can afford. If you make it your policy to only charge on your card what you know you can pay for when the bill comes, you won’t go into credit card debt.
Now I realize that sometimes emergencies force people to spend more than they have at the time. Sometimes it can’t be helped. But if you are buying something you can’t afford just because you want it, then save for it. Work for it. When you finally buy it, pay for it in cash. Or, charge it to your credit card, and pay the bill in full when it comes.

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4 Responses to Your Questions About Eliminate Debts Credit Cards

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