Editorial Policy

4 do-it-yourself debt reduction tips

Erica Sandberg

April 21, 2015

QHi Erica,

I went to Consumer Credit Counseling Service due to my credit card's very high APR. I pay my bills on time, but my balance has barely moved. The balance is $3,000, which is also my limit. My counselor said that I qualify for the debt management plan, and she can lower my present APR from 29.99 percent to 6 percent. I know this is a very good deal, but I am wondering if it is worth it.

I was told I had to cancel my card, but I want to have an emergency card. My card is with Chase bank, which I have had since 2009, and I have a checking account with them, too. Would I have to close my checking account, too? The rest of my debt is $42,000 in student loans; I pay $530 a month and have 8.2 years left. I guess I'm asking you if it is a good idea or a bad idea to do a debt management plan. Thank you, Erica — love your column! –Katie

ADear Katie,

To me, the answer is clear: The credit counseling agency's program (the debt management plan, or DMP) is not your best option. Yes, you can use it, and it would help, but I think you'd be better off with a DIY plan.

The agency would require you to close the credit card (but not the checking account), and in general it is a good idea to have at least one active card. While you can't charge with it right now because you're at your limit, after you delete the debt, the charging line will once again be at your disposal. Another reason: Most credit counseling agencies charge an administrative fee, which can be up to $50 a month. You may as well put that money toward your monthly payment.Ask Erica

Here is the plan I think you should adopt instead. It will require some work on your part, but you'll soon see that the savings will be well worth your time.

  • Refer to the credit counseling agency's budget. When you met with the credit counselor, I'm sure the two of you developed a current and proposed spending plan. That means you already know how much you earn on a net monthly basis, the amount you need to live on and what you have left over for debt repayment. Use these numbers as the foundation for your personal financial plan. For example, you and the counselor may have determined that after some budgeting, you have $125 to spare for a regular card payment. Keep that figure in mind.
  • Explore a student loan deferment. Because many student loans typically have low interest rates, you could come out ahead if you concentrate your dollars on the card debt first. Contact your loan holder and ask if you're eligible for a deferment. If so, you might be able to postpone payments for up to a year and no interest on any subsidized portion will be added to the balance. Deferments are not guaranteed, but if you can prove economic need, there's a good chance it's available to you.
  • Determine a big, fat fixed payment. Paying only the minimum for a credit card debt is disastrous with an interest rate as high as yours. In fact, it would take you about 27 years and more than $11,000 in financing fees if continued down that path. For that reason, it is imperative that you figure out the most you can send and never go below that sum. If you can defer your student loans, apply what you've been sending them to the credit card company, plus what you determined with the credit counseling agency was reasonable for the card. For example: If the total is $630, in six months you'd completely pay off the Chase debt. The financing cost? Just $230 or so. Of course, this means not adding to the debt, so don't use the card until you hit a zero balance, and then only use the card if you can pay in full and on time each month.
  • Ask Chase for an interest rate reduction. Here's good news: My contact at Chase explained that the rate you have is probably a result of paying late more than a few times (maybe you've been responsible lately, but were not some time ago?), but if you make six consecutive on-time payments, Chase will almost certainly return you to the prior, lower rate. Although the APR won't matter if you pay whatever you charge in full each month once you get this debt paid off, it's good to have if you ever do choose to split a large charge into a few installments.

You will still have the student loan after the card obligation is satisfied, so go back to hitting it hard. Don't let the low rate fool you. With a debt that large, finance fees will increase the bill significantly. Every dollar paid to interest is that much less for fun and security.

And thank you, Katie — I love that you're reading and learning!

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