I am retired and struggling to pay off $ 25,000 in credit card debt. What can I do?
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Dear credible money coach,
I am married and my credit card debt is approximately $ 25,000. Of course, they all have high interest, and paying the minimum takes forever. These cards are in my name, not my husband’s. I probably wouldn’t apply for a consolidation loan since I’m retired and only have Social Security as income. Obviously, I draw money from our joint account, but it is killing us. We’ve been dealing with it for years. What’s your suggestion?
Thanks – Beth
Hello, Beth. I am so sorry that you had to deal with this financial burden. You are not alone in this struggle. At the end of 2020, Americans had an estimated $ 825 billion in credit card debt, according to the Consumer Financial Protection Bureau.
And you’re right that making just the minimum required payment each month means it will take a long time to pay off your credit card debt. Credit card issuers are required by law to include a warning on your monthly statement explaining how long it will take to pay off your balance if you only pay the minimum. The statement should also tell you how much you will need to pay each month to fully pay off the debt in just three years.
This information can be a good starting point for formulating a management plan. pay off your credit card debt. Your plan may include several tactics, such as going through the debt avalanche method, taking out a personal loan to consolidate your credit card debt, and rebudgeting to give yourself more money to spend on your credit card payments.
Let’s look at some strategies that might be helpful.
Before doing anything else
Gather all of your credit card statements and call each card issuer. Let them know you’re having trouble and looking for other ways to pay off your balances faster. Ask for an interest rate cut or temporary reduction in payments (although the latter kicks the box).
While the law doesn’t require a credit card issuer to make any concessions, it’s always worth asking if the card company can help in any way. At the very least, they can suggest other options that they can offer. And at best, you may be able to lower your interest rate if there’s a promotion you’re eligible for.
Consider an avalanche or debt snowball repayment plan
Beth, you didn’t say what other types of debt you might have, but with $ 25,000 in credit card debt and a fixed income, any other type of debt probably seems just as heavy. You might consider employing a comprehensive strategy to pay off all of your debt, including credit cards.
Two options are the Debt Avalanche and Debt Snowball methods.
With the debt avalanche method, you prioritize paying off the debt with the highest interest rate. Continue to make minimum payments on all other debts and spend as much as possible on that most expensive debt. This will help you pay off that debt faster. Once it’s fully paid off, focus on the card with the next highest interest rate, and so on.
the debt snowball method focuses on paying off debt with the smallest balance first, regardless of the interest rate. Pay the minimum on all your other debts and invest more to pay off that card. It may be faster and easier to pay off that small balance first, and after that debt is gone, you can allocate the amount you paid to the next largest debt, and so on.
In addition to helping you pay off debt faster, these two methods can give you a psychological boost as you will have the satisfaction of seeing your debt go down.
Replace high cost credit cards with low cost debt
The challenge with the Debt Avalanche and Snowball methods is that they rely on you having extra money to spend on your credit card debt. This can be difficult if your budget is already tight.
Turning high-cost credit card debt into low-interest debt can be a way to give yourself leeway to move faster toward paying off your total debt.
Here are two possible ways to do this:
Apply for a 0% APR credit card and transfer your balance
Some credit card issuers offer cards that come with 0% APR for a limited time when you open the card and transfer the balance from another credit card. At the end of the promotional period, a regular interest rate will be applied to any remaining balance. If you can repay the full amount transferred before the promotional period ends, it can be a good way to avoid paying interest charges for those months and pay off the debt faster.
A few caveats to be aware of, however:
- The 0% APR is for a limited time, often around 18 months.
- The promotional rate usually only applies to the amount transferred, and not to new purchases you can make with the card.
- You will generally need good to excellent credit to qualify for a balance transfer card.
- Credit card issuers usually charge a fee to transfer your balance.
- You may not qualify for a balance large enough to transfer all of your debt.
Apply for a low-rate personal loan
Credit cards are among the most expensive types of consumer credit. I say âprincipalâ because some types of bad loans, like payday loans, can have three-digit APR fees. Since you said your credit card interest rates are high, you might get a lower interest rate with a personal loan.
A personal loan can have several advantages over continuing to pay the minimum on your credit cards, including:
- Potentially lower interest rate – In August 2021, the average credit card interest rate was 17.13%, while the average 24-month personal loan rate was 9.39%, according to data from the Federal Reserve.
- Final payment date – It can be difficult to know when you’ll be able to finish paying off your credit cards, especially when you’re only paying the minimum amount. Personal loans have final loan terms, so you’ll know exactly when you’re finished paying off the debt.
Although your credit card debt is in your name, there is no rule that says you are solely responsible for any personal loan used to pay off that debt. Combining your Social Security income with that of your husband can help you meet the income requirements that a personal lender may have.
As with any type of credit, however, personal loans come with possible drawbacks:
- You will usually need good to excellent credit to get the best rates, although adding a co-signer with a higher credit score can help.
- Some personal lenders charge a set-up fee and other fees.
- If you use the personal loan to pay off your credit cards, but keep adding new debt to the cards, you might find yourself in even more debt.
You may also want to consider bankruptcy if you find that none of these suggested strategies are right for you. But bankruptcy should always be an absolute last resort – its financial and credit effects are large and long-term.
If you decide to transfer your high interest credit card debt into a form of low interest debt, it is essential to shop around to find the best deal. Rates and terms can vary widely from one credit card company to another and between personal lenders.
You can use Credible for see the rates of prequalified personal loans and get information on fees from Credible partners.
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About the Author: Dan Roccato is a clinical professor of finance at the University of San Diego School of Business, Credible Money Coach personal finance expert, published author and entrepreneur. He has held leadership positions with Merrill Lynch and Morgan Stanley. He is a recognized expert in personal finance, global securities services and corporate stock options. You can find it on LinkedIn.