- Money: Raise Everything You Need without Borrowing a Dime - February 27, 2008
- Look for Lenders that Benefit from Your Success - February 27, 2008
- How to Get Out of Crushing Credit Card Debt - February 27, 2008
In a previous article, I showed why it’s better to finance a business without any personally guaranteed debt, such as through using credit cards. But if you nonetheless find yourself dealing with crushing credit card debt, take heart. There are ways to straighten things out.
This article will show you how you can get out from under credit card debt in a way that you can actually build your credit score rather than diminish it.
Credit card companies set interest rates according to your credit score. Most of this credit scoring is done with your FICO rating, although other credit scores are sometimes used.
Credit scores go up and down. As you increase your indebtedness, your score generally falls, which is a negative. It helps if you pay on time, but it is difficult to preserve a high FICO score if you are increasing your credit card debt month after month.
What gets people into the biggest trouble is when they only make minimum payments. If they have a number of credit cards on which they only make minimum payments, then the banks begin to raise interest rates to a so-called default rate. This can be 20%, 24% or even 29%.
When you accepted your credit card, you agreed to this default rate. But even if you pay on time, you can still end up getting this punitive rate. All it takes is enough indebtedness showing up on your credit report. And what counts is the direction your indebtedness is taking. As it increases, your credit score falls and your interest rates may rise.
So what some people do is telephone their credit card company. The first line of customer “service” agents will punch your information into their computer and say: “Sorry, we can’t help you. 24% is what the computer is saying is the best rate we can do.”
You’re not in a good position because you can’t just pay the balance off and close the account. And they know that. That’s why credit cards are so profitable for issuers — they can get people on the hook for years (essentially forever) with high interest rates, because their customers can’t pay off the balances.
Many people begin thinking about bankruptcy at this point. But as an entrepreneur, bankruptcy holds a special place in hell for you. It signals to future business partners that you are not a reliable person. There is a huge stigma attached to bankruptcy. And nowadays, bankruptcy may not help you much if you end up in a Chapter 13 situation, when you have to pay off your creditors over a period as long as five years.
Before I share the rest of my advice on this situation, I do want to advise you to see a lawyer and get your options clear. Always take legal advice from a competent attorney and not just from an article. It is reassuring to see a bankruptcy lawyer, understand your options and realize that what you are going through is common.
But there are a lot of downsides to bankruptcy, and there is a way to avoid it. You can do this by settling your credit card debts in such a way that will build up your credit score, not diminish it. This lets you live your life, continue building your business or perhaps start a new one without being dragged down into a minimum monthly payment abyss for years.
How to get out from under the debt
- Determine how much you can pay on old bills each month. This may be $100, $500 or $2,000. You have to make sure that you pay your rent or mortgage, insurance and all the other costs of living. And what is left over? Allocate a reasonable, realistic amount for past bills.
- Make a list of all your old bills. Include all the credit card debts for which you are personally liable. Include any business debts you might have to pay, as well as old medical bills.
- Determine a payoff period. 24 or 36 months is great. You might consider going up to 60 months, but never more.
- Figure out how much of each bill could be paid off in equal payments over that payoff period. Don’t worry about interest at this point. Use an Excel spreadsheet, determine the monthly payment you can afford and allocate it in pieces, pro rata, to all of your old bills.
- The previous steps should tell you where you need to be. Will that pay off the entire amount? Or will it only cover half or a quarter of it?
- Armed with this, now call up your credit card company and speak to a supervisor in the collections department. You get access to them by explaining that you won’t be able to pay the full balance along with the 24% interest rate. Be courteous and polite but insistent. Tell them you will be making a settlement offer.
- Prepare and send a written offer for settlement to all your credit card companies and old bills. This is a specially written document that offers a fair payout to them, explains the alternatives, and requires them to agree to favorably report to credit bureaus after you’ve met your payment agreements for 12 months.
What you are doing is an alternative to bankruptcy. Why should the credit card companies agree to this? The answer is simple: They would get little or nothing in a bankruptcy. Nowadays, if you owe enough or if your income is too low, you can get a Chapter 7 discharge of debts that leaves the credit card companies nothing. So you’re outlining to them an alternative that gives them some money rather than none.
There’s a system to doing this type of settlement, and it can get you out from under even the worst of credit card debt situations. Make sure you get all your ducks in a row if you try it.
- If you get in over your head with credit cards, you can negotiate your way out.
- You can get the credit card company to lower the interest rate simply by insisting.
- You may have to stop making payments temporarily.