I was making $100K a year, but racked up $85K in credit card debt. Now I shop at Aldi and drive a 2007 car, but am still struggling. How to get out of debt faster
Question: Over the past few years, I’ve accumulated $85K in credit card debt. I was working two jobs and making $100K per year, but once COVID hit, I lost my second job and haven’t been able to find another one that pays anywhere near what I was making before. I joined American Consumer Credit Counseling, a non-profit counseling agency, and they got my card companies to reduce their interest rates, but I am paying $1,837 a month, while only earning a $58K salary. I’ve been working odd jobs, I’ve sold almost everything I own, I buy my groceries at Aldi and I am driving a 2007 vehicle, but I don’t think I can make it given how much I’m paying per month in credit card debt. I was living on a shoestring before COVID hit, and with the current price of gas and food, I’m barely getting by. My credit score is hovering around 640 — I’ve never made a late payment and I always pay more than the minimum but my debt-to-income ratio is now horrendous. I have no idea what to do. Help!
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Answer: First of all, you should be proud of yourself for getting this far in your repayment plan, says Matt Schulz, LendingTree chief credit analyst, who also notes that you’ve likely already eliminated a chunk of your debt. You also live very frugally, and made a helpful move in getting your interest rates lowered, which is something readers in deep credit card debt should look to do, too.
So what’s next? For some people, tackling credit card debt could be done using a personal loan, as issuers offer rates starting at around 5%. “Personal loans work best for large, one-time expenses like home improvement projects and debt consolidation. The best personal loans help you achieve a financial goal like getting rid of credit card debt, but be sure to compare them with other financing options to find the right fit,” says Annie Millerbernd, personal loan expert at NerdWallet says. But with your credit score, personal loan interest rates might well be higher than what you are paying now.
So instead, Schulz advises that you get on the phone with your credit counselor and let them know that you’re now earning less money. “They need to find some way to extend that payoff period and reduce their monthly payments,” says Schulz. Marguerita Cheng, a CFP Board ambassador, says the same, noting that existing customers enrolled in debt management programs can contact customer service and explain their situation to try to get more manageable payments. “You can provide documentation to ACC regarding your income,” says Cheng. Because you want to pay off your debt but the proposed payment plan isn’t sustainable, Cheng says it’s worth mentioning to ACC that the $1,837 monthly payment represents 38% of your gross monthly income. “You can ask them to modify your payment which may extend your debt repayment plan,” says Cheng.
Something else to consider: If you typically receive a tax refund, you may want to consider your tax withholding. “Instead of receiving a windfall in the way of a tax refund, by reducing the amount of taxes you are having withheld from your paycheck, you can have more cash flow throughout the year,” says Cheng.
And it may even be worth considering other options beyond the debt management plan, if the counselors aren’t willing to work with you. “You can try getting a zero-percent interest balance transfer credit card and moving your debt onto that. But with your credit score, there’s no guarantee you’d be approved for the card and if you are, the credit limit might not cover the amount that you owe,” says Schulz.
Lastly, negotiating a debt settlement in which the creditor allows the borrower to pay back less than the full amount owed might be a feasible option. “That sounds like a great deal on its face. However, it typically destroys your credit. Plus, the amount that is forgiven typically becomes taxable income, so they might get stuck with a big tax bill later on,” says Schulz.
Hence, the best option Schulz lays forth is reworking your debt management plan to better reflect the realities of their current financial situation.