Credit card debt is stressful. What makes it even more stressful is all the credit card debt relief advice and options. One source will say that getting help with credit card debt will help your credit, another says it’ll hurt it. Don’t you just have to pay the minimum payment? There’s so much information out there that it’s hard to sort through and separate fact from fiction. We’re clearing the air by breaking down the most common credit card debt relief solution myths and setting the record straight.
Myth #1 – Minimum payments are enough
Minimum payments, while enough to keep debt collectors away, do little for actually paying off debt. Here’s why. The vast majority of a minimum payment goes towards interest, leaving the original debt amount virtually untouched. Credit card companies like it this way because it means they get to collect interest again the following month. In the end, by paying just minimum payments, you can easily pay out double or even triple the original cost of what you bought.
Paying even just an additional $10 or $20 goes a long way towards getting rid of that original debt. If you need a little motivation to keep on track, before hitting the Buy Now button, take another look at the price on the screen. Is whatever you’re buying still worth it to you if you pay double what the screen says?
Myth #2 – All credit card debt relief options reduce what you owe
Some debt relief programs, like Consumer Proposals and Bankruptcy, do cut down on what you owe. The majority, though, focus on eliminating the extra costs that come with the debt rather than the original debt amount. Debt Management Programs (DMP), for example, drastically cut or often eliminate interest altogether. That means all of the payments you make go towards paying down the principal debt amount. That’s what helps those doing a DMP get out of debt so much sooner.
Granted, you might get out of debt sooner by doing a Consumer Proposal or Bankruptcy, but the aftereffects of these options are much more drastic. Your credit score will take a much more significant hit. The trade-off between the speed of paying off debt and the consequences is one of the major considerations when deciding which debt relief alternative is best for you.
Myth #3 – Deny. Deny. Deny.
You might hear some talk about how there’s a statute of limitations on debt. That after a certain period of time, the debt can’t be collected anyway, so just ignore it, and eventually it’ll just go away. As tempting as burying your head in the sand and ignoring credit card debt is, don’t. Sadly, trying to wish it away isn’t a good idea either.
On one level, yes, after the statute of limitations has passed, creditors can no longer take legal action to recoup their money. That doesn’t stop them from trying. There are no laws against them continuing call you or visit you in an attempt to get payment. There’s also credit to consider. Unpaid debts stay on your credit report for much longer than the statute of limitations allows for court action. A low credit score has a lot of impact on a person’s financial future. It really is best to face the situation head-on. Talk to the creditor or get some help from a debt relief expert to put a plan in place to deal with the debt and get it off your shoulders.
Myth #4 – All credit card debt relief is the same
All credit card debt relief programs have the same goal: to get people out of debt. However, how each program goes about achieving that goal is very different. Each debt relief solution has its own method of speeding up the process of debt repayment. Some rely on cutting down the principal amount, others on reducing interest and fees. Some solutions require the help of a financial expert, while others can be done by the borrower themselves. The consequences that come with each solution also vary greatly. All this to say that each debt relief method has its advantages and disadvantages. Which one is best for you depends on a lot of factors, such as;
- Income level
- Amount of debt
- Credit score
- How long you’ve had the debt
- Where you live
If all this is confusing or overwhelming, a good Credit Counsellor can assess your financial situation, go over the options with you, and make an informed recommendation as to which one suits your situation best.
Myth #5 – You will always save on interest
It only makes sense to assume you would save on interest by doing a credit card debt relief program. While it is often a correct assumption, it’s not always the case. Yes, you will likely save on immediate interest costs. That being said, it’s not unusual to pay out more interest in the long run when you adjust your debt payments.
Let’s use a credit card with a $5,000 balance on it as an example.
If that card originally has a 20% interest rate and you pay $250 a month on it, by the time it’s paid off, it’ll be 37 months later, and you’ll have paid out over $1,133 in interest.
That same card with a 17% interest rate and paying $175 a month will take 25 months to pay off and cost you over $1,454 in interest.
So even though you have a lower interest rate and are easing your current cash flow, in the end, you’re paying out much more.
This is a very common scenario for those who do a debt consolidation loan. Take time to calculate what you’ll be paying out when everything is said and done to make sure the immediate relief is worth the long-term cost.
Myth #6 – Only affects lower-income people
Those who earn a lower income are impacted by their share of credit card debt, but rest assured, higher-income households also face debt challenges. A phenomenon called lifestyle creep is a common cause for higher-income debt struggles. This is when a person’s everyday costs creep up to match their increasing wage. As they earn more, they move to a more expensive home, get a nicer car and so on. As such, they need more cash flow to stay afloat when a financial setback, like job loss, happens. If they haven’t prepared ahead of time to manage their cash flow needs, they face some hard financial struggles quickly.
A higher income can also lure people into a false sense of financial security. Which means they may not prepare for setbacks as well as they should, or that they assume things will turn around quicker than they actually do. Both of these things can really throw these people, and their finances, off kilter.
Myth #7 – Credit card debt relief programs ruin your credit score
Yes, most debt relief programs will involve some sort of impact on a person’s credit score. It’s a hard pill to swallow, but there’s no getting around it. Here’s a bit of perspective that will hopefully help the pill go down a little easier. By the time people look into getting help from a debt relief program, they have typically already been struggling financially for a while. That being the case, it’s not uncommon that they are already behind on bill payments. Paying bills on time is the most significant factor that goes into calculating a credit score. The fact that they have missed payments means their credit score has already taken a hit. The sooner someone takes action to get back on their feet, the sooner their credit score will rebuild. Looking at things this way, a debt relief program can speed up the financial recovery and credit rebuilding process.
Tips for choosing and maximizing your credit card debt relief program
- Put as much spare cash towards your debt as you can. Every little bit really does count.
- Resist the temptation to dilute your progress by using your credit cards. To help, consider removing your credit card information from your computer’s auto-fill feature.
- Don’t wait to get help! The sooner you get help, the quicker you’ll be back on your feet and the more debt relief options that will be available to you.
- Do your research. Dig into the various credit card debt relief options there are. Make sure you understand their differences so you can make an informed decision as to which one to go with. Also, research the company you’re considering working with before you move forward.
- Build up a small emergency fund to avoid unexpected expenses from eating away at your debt repayment progress. Once the debt is paid off, set up a full emergency fund.
- This is your chance for a fresh financial start. Don’t waste it. Learn and grow from it by taking time to expand your financial literacy skills.
- If you’re overwhelmed, consider talking to a Credit Counsellor. They are well-versed in all the various debt relief alternatives and can guide you towards the right one for you. Call for a free, no-obligation consultation.
It’s our hope that by clearing up these misunderstandings about credit card debt relief, you’ll be more comfortable reaching out if you’re ever struggling with debt. Your future self will be grateful that your current self took action to better your financial footing.
