The Good, Bad and Ugly in Debt Relief
Overview
Credit card usage for your parents and grandparents was very different than
today's options. The limits were imposed, regulated and restrictive. In modern
American financial systems, credit card usage has escalated and availability
continues to rise.
The cycle is starting earlier; college graduates average $20,000 in debt one in five
18-24 year olds in debt hardship and 41% have credit card balances. 26% of
Americans report paying bills late or not paying every month, and 59% say they
would pay credit card bills last in lean financial times.
The Good
Best scenarios are to work at paying off credit card balances in a timely fashion,
on or before the due date. To use minimum payments on only rare occasions and
to restrict credit card purchases to strategic use rather than everyday usage.
When that isn't possible, look at interest rate levels which can range from single
digit number to 29% with an average of 13%. In many cases, promotional
interest rates are advertised to switch consumers to a card, and the rate may be
for a limited time only or may be raised without notice if payments are late or
balance exceeds acceptable levels.
The Bad
When credit card debt levels grow out of control; many Americans look to
bankruptcy as a solution. Since bankruptcy means that creditors are not paid, they
have lobbied to make changes in the legislative regulations managing the
bankruptcy process.
The Chapter 7 option for bankruptcy which allows for a fresh start and a clean
slate (with some exceptions) is now much more difficult to achieve. Chapter 13
bankruptcy requires the Court to manage the priority of payment, eliminates
interest payments but requires full payment of the debt. In both cases, the impact
on personal credit limits is long lasting and will prevent some credit options for
seven to ten years and may even impact hiring decisions for some job positions.
The Ugly
Debt settlement is a trend for many consumers overwhelmed by credit card debt.
Consumers hire a professional negotiator to reduce, forgive or eliminate debt
reducing the total debt to pennies on the dollar.
Since this often requires immediate settlement of the debt, often at a reduced
amount; the consumer may need to pay the negotiator for months until the
required amount is collected. During this time collection activity continues,
collection may actually escalate since no payments are being made to the creditors
during this time.
There are negative impacts with this choice and the impact is certainly less public
than bankruptcy but lasts as long.
Conclusion
High interest rates, fees and penalties can have a devastating effect on the
household. Dropping credit scores can impact ability to find housing, cars and
even jobs.
The best solution is to keep a tight reign on the use of credit, using it strategically
to build credit scores rather than to decrease them, but in the absence of this
making the right choice for the consumer, their future credit options and current
debt load requires research, deep consideration and careful planning.
