A new Card Hub study based on recent data from the Federal Reserve suggests credit card debt will rise by a net $20 billion this year, as consumers are paying down their personal credit card debt at a much slower rate than in recent years.
First quarter 2011 saw consumers pay down 26% less credit card debt than they did in first quarter 2010 and almost a full third less than first quarter 2009. That’s all well and good for credit card companies – the slower the pay down, the more they collect in interest and fees.
But some economists are predicting a double-dip recession, and warning that rising consumer credit card debt could make that second dip all the deeper. If you want to prepare for the worst, you’ll adjust your budget, stop borrowing and take immediate action to reduce and eliminate your credit card debt.
If your income is down and you’re buried in personal credit card debt, the quickest way to climb out of the hole, without declaring bankruptcy, is to settle your debt for less than you owe.
A settlement program will damage your credit score, but could dramatically improve your financial situation. If you have a legitimate financial hardship and enough credit card debt to at least consider bankruptcy, creditors will likely be more than willing to negotiate a principal reduction.
Why would a creditor zero out a credit card debt for less than the full balance? The answer is rooted in a simple axiom; an unalterable truth that you can trust is 100% accurate 100% of the time:
Your creditors will always, without exception, do what they believe is best for their bottom line.
For you, it’s very personal. This is money you borrowed with the expectation that it be paid back. Your good name is on the line. You gave your word. For you, your debt is intensely personal.
For your creditor, it’s never personal; all that matters is the bottom line.
Creditors have millions of cardholders across all income groups, so when unemployment hits 9%, they feel it on a practical level. As such, your creditors understand better than most that real hardships occur, and they need processes in place to deal with delinquent credit card debt.
Principal reduction is effective because it’s often best for a creditor’s bottom line IF you have a legitimate hardship AND you are a candidate for bankruptcy.
Bankruptcy is bad for you, sure, but it’s bad for your creditors as well. So in many cases creditors would much rather recoup a portion of the principal and write off the debt they forgave for tax purposes – it makes more sense for their bottom line than a bankruptcy.
Of course, creditors would much rather collect the full principal and a decade’s worth of interest from you; but if that’s not a viable option due to hardship – job loss or reduction in hours, unexpected expenses, medical problems, etc… – creditors can be quick to realize that a principal reduction is best for their bottom line.
Particularly if you’ve been paying on the cards for years – it’s possible the creditor has already collected so much from you in interest and fees that they could forgive a large portion of the principal and still count you as profitable.
To find out if you qualify for settlement, and if not what approach would be best to eliminate your debt and prepare for the worst, consult this Debt Coach tool. Find a plan, develop a budget, commit to it and take control of your credit card debt.