How can I dig myself out of this credit card hole?

November 16, 2008 2:31 PM

Given the current economy, would doing a "charge-off" on my credit cards be a reasonable option, and how would I go about doing it for my biggest benefit?

Many years ago I had a college credit card that I couldn't afford to pay off. I finally asked about a charge-off on it; about 80% of the card's balance is as low as the company would go. Given that the balance was about $2000 I don't feel the charge-off was really worth it, so I didn't do it.

Soon after that, I bought my first house.

Now however I find myself in much worse credit card debt, nearing $30,000 over a span of 6 cards. The two highest cards have $8,000 balances, and then a few thousand on various other cards. Most of these cards are charging me 30% interest. I have taken a second job, well paying, just to pay off these cards but the interest rates are so high that I just can't seem to make a big dent. Working all of 08 putting all my 2nd job's money to the cards, not using the cards and I'm only in 3k less debt than I was.

I know of some people who told me that they were able to get cards charged off for pennies on the dollar without declaring bankruptcy. I told them it probably hurt their credit, but they were just happy to have the debt gone and credit scores recycle every 7 years anyway...

So I'm reminded of my charge-off experience and that they'd only go t 80%...if I could get even 50% on one of the $8k cards, I could pay that now and save myself so much in interest and use the snowball method to pay down the others...but when I tried last time they just wouldn't go that low.

Complication: My wife and I DO plan to move before the next 7 years, which would involve selling our current house and buying another, so I really DON'T want to nuke my credit where I can't move for 7 years.

Any suggestions on what to do here?

posted by arniec to Work & Money (10 answers total)

Keep working a second job, have your wife get a second job, sell stuff you don't need on e-Bay, and be more careful in the future? I don't understand why you think you should be let off the hook so easily for credit card debt you incurred.
posted by kimdog at 2:49 PM on November 16, 2008

Well, first thing you need to do is call each credit card company and negotiate lower interest rates -- 30% is absurdly high. Call them and see how low they can go. Also, as scabrous said, if you're running in place, then you need to review your budget.

I'm sure you know about consumerist.com, which does a decent job of laying out tactics and strategies for people in your situation. If your wife and you do plan on moving in the next seven years, know that your credit card situation may very well prevent that. You may not want to nuke your credit, but you've already nuked your finances, so right now the only thing you can do is pay off the debt. Having financial problems means that you can't do the things you want to do.
posted by incessant at 3:03 PM on November 16, 2008 [1 favorite]

Snowball. Also, Dave Ramsey (book, radio show and podcast).

If you can, consolidate the higher interest cards right away, but still work the snowball on all of them.

Also, I think you mean settlement and not charge-off. The charge-off is the card company claiming the bad debt and selling it off to a collection agency - who will be contacting you.
posted by cdmwebs at 3:04 PM on November 16, 2008 [2 favorites]

Yikes, those interest rates are horrendous. Be sure to concentrate on paying down the debt on the card or cards with the highest interest rate first. Just make the minimum payment on the debt on the lower rate cards. If you have any option of transferring balances from higher interest rate to lower interest rate cards, then you should do that as well.

Is there any chance of getting a lower interest rate loan, perhaps from a family member, to pay off even one of the $8000 cards? A friend had a college tuition loan where the interest rate was really painful, and managed to get his father-in-law to pay it off, and then paid his father-in-law back, with interest, but at a much lower rate. Given your debt, you will probably have to put loan terms in writing, in order to reassure the lender you will pay.

Also, needless to say ... 6 credit cards? That was asking for trouble. You should get it down to just one, with perhaps 1 backup card you rarely use.
posted by gudrun at 3:17 PM on November 16, 2008

you've already nuked your credit if you are paying 30% interest for consumer credit. if you had decent credit, paid on time, and were never overlimit, you would be able to negotiate your interest rates down in a few phone calls.

bankruptcy exists to give people in real financial difficulty a second chance. not so that someone who earns your salary can walk away scott free. if you were out of work or your mom was in the hospital and you were the person paying her outrageous medical bills or something here that's going to provide a real clear reason for people to feel sorry for you, you're not going to get it.

why do you get to walk away from this debt? clearly you are doing something very, very wrong if you are working two jobs and are not making a dent. please go see a credit counselor, and cut up every card but one, which you should freeze in the proverbial cup of water for emergencies.

for your "biggest benefit"? how about, man up and pay off your debt?
posted by micawber at 4:00 PM on November 16, 2008

..if I could get even 50% on one of the $8k cards, I could pay that now

Wait, so you have $4,000 accessible, and you haven't put it torward at least one card already? This may be why you are not making a dent! Or, would this money be a loan or some other method of beg/borrow/steal?

Regardless, there were suggestions of financial management stuff upthread. Take these suggestions, embrace them, use them. You do not seem to have a very good handle on personal finances, historically, and from the settlement conversation with your friends, you may not have any good role models in friends, either.
posted by kellyblah at 4:11 PM on November 16, 2008

Best answer: First, contact all your cards and ask for a lower interest rate. This probably doesn't work as well in the current market as it did a year or two ago, but it doesn't hurt to ask. If you've actually faithfully paid on time they're probably going to be open to a lower rate.

If you don't get one by asking, threaten -- to move your balance. To another card, or pay off using that $4K. The balance-transfer gambit is hard now that there are fewer 0% offers out there, but going from 30% to 18% is still a win for you.

If you can't get this to work, then deal. Suggest a hardship plan where they freeze your line of credit while you pay it down at a lower interest rate. This might buy you 3 to 6 months or even "until paid off".

NOW, once you have the lowest rate/monthly payment you can negotiate, put things into a snowball chart. See how fast you can get things paid off.

If, and only if, you still can't manage your payments, then you need an accredited credit counselor who can negotiate with your lenders. Or you can consider options like settlements.

But beware! Nobody has yet told you in thread that a settlement will be counted as income for tax purposes. (Keep in mind you were already given the money, or the consideration in the form of unpaid interest.) You may not hear it from the lender! But the IRS will tax it as miscellaneous income on top of your regular income, and there's no withholding, so you'll want to carefully consider your annual taxes when you do this, especially with more than one.

A consortium of banks and a consumer org proposed to the USG that they could in fact settle credit card debt by spacing the income/charge-offs over 3-5 years, but the Currency Comptroller rejected this for technical reasons involving transparency of risk. In any case, it's something you should be aware of when settling debts.

WCityMike, Prosper is in a pre-IPO "blackout" mode. Also, I don't think bankruptcy is the kind of red flag to wave as they might just want your interest rate even higher. Calculated Risk suggests how NOT to write a hardship letter and it probably has useful advice here: What they want to hear is a concrete proposal for a budget and a paydown, not a sob story.

Burhanistan, I don't subscribe to the "suck it up" theory which is getting a lot of currency around this crisis. Credit was all but pushed down people's throats and then credit contracted, jacking rates up. It's perfectly legitimate to seek a settlement, but the reasons for doing so or not should be practical, not moral.
posted by dhartung at 12:25 AM on November 17, 2008 [2 favorites]

I would be pretty cautious about mentioning bankruptcy to a creditor. That said, I called my primary credit card company, asked nicely for a lower rate, vaguely threatened moving to another card, and got a huge rate reduction. 5 minute phone call with a great outcome.
posted by theora55 at 7:50 AM on November 17, 2008

Chapter 7 bankruptcy is on your credit report for 10 years, not 7. But anyway, there is a misunderstanding among many that you can't borrow money during that entire time -- that is very false. You can start getting unsecured credit cards as soon as 6 months post-discharge, and can get a "decent" home loan rate as soon as two years post-discharge as long as your new credit history looks good. So as far as not being able to move goes, that isn't really as big of an issue as most people think.

Now, there are some lenders who will not do business with you if you have the BK still on your report (either 10 or 7 years depending on how you file), and companies/banks/credit unions who lent you money that you then default on will often not let you do business with them again. These are the primary actual downsides of filing. But after you BK, you'll find that people start offering you credit again for cars and things almost immediately.

If you're paying the default rates on your credit cards, the companies already know you're on the path to defaulting and are trying to squeeze what money they can out of you before you do. It also means that your credit is already pretty screwed. The decision you have to make is whether BKing (and starting the 10 year clock *now* to get ALL negatives off your report) versus trying to make it work for the next few years and having to wait 7 years for the non-BK negatives to fall off. Do the math and see if you think you can pay off the debt at the interest rates they're charging you. If not, consider bankruptcy. If you think you can realistically pay the high-interest debts in <>
Oh, and don't mention "bankruptcy" to any lender until you've actually filed. That's a wonderful way to ensure they don't lower your rate. Also, if you're at all thinking about filing, now is the time to open a bank account unconnected with any of your lenders and move your money there. If you file, they'll close off access to any existing accounts and you'll have a hard time opening a new account with anybody right after a BK.
posted by BrandonAbell at 12:51 PM on November 17, 2008 [1 favorite]

The angle brackets broke my post. What I was trying to say there was that if you think you can pay off your high-interest debt in less than 5 years than do what you have to do to make that happen.
posted by BrandonAbell at 12:55 PM on November 17, 2008 [1 favorite]