What should I do if I’m having trouble with credit cards?

At one time or another most Americans have had at least some trouble with their credit cards. Difficulties can arise because of high interest rates, late fees and other charges imposed on the accounts, escalating payments or decreased credit card limits. Perhaps you have too many cards, with balances that never seem to get any lower.

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For most credit cardholders, trouble means that you’re falling behind on your payments and concerned that your credit rating is starting to slip. The best remedy for this problem is to take action immediately! Waiting only makes matters worse, and could seriously affect your credit standing for a number of years.

What can I do when trouble first starts to develop?

1. Stop using your credit cards!

If it’s practical to do so, put them in a drawer, but don’t forget about them.

Find out where you stand by running a current credit report. A report can be obtained free of charge once each year, from AnnualCreditReport.com. This is a central website, which connects all three major credit reporting agencies, Equifax, TransUnion, and Experian.

Many people are surprised to find that their credit isn’t as bad as they thought it was. You also want to know exactly where you stand before taking further action. If your credit score is better than you imagined, you will probably have several more viable options for getting out of trouble.

2. Call each credit card company!

At the first sign of trouble, you should call to negotiate with your credit card company what payment options they may have available. Banks and credit card companies would much rather receive smaller, consistent payments than sporadic payments or none at all. Some banks will temporarily reduce credit card interest rates as well, giving you a chance to make a dent in your outstanding balance.

3. Only make promises you can keep!

Be honest, and make sure that whatever payment arrangements you negotiate with your credit card company are reasonable and manageable, taking into account your current financial situation. Remember, as long as you are faithfully making monthly payments that are acceptable to your creditors, you will be preserving your credit rating.

4. Find a more permanent solution!

You certainly don’t want to liquidate your life savings or retirement accounts to pay off credit card debt, but at least paying down your higher balances might help to significantly reduce your payments and improve monthly cash flow.

If your credit standing is still reasonable, you can look for a loan to consolidate credit card debt. This could be a personal loan, or a secured loan such as a home equity line of credit (HELOC). This type of loan combines your smaller outstanding debts into one large loan for a term that may range from five to 15 years.

Interest rates may be fixed as in a refinanced home mortgage, or variable, as in the case of a HELOC. Either way, rates will be sharply lower than the average credit card rates of 15% to 16%. The resulting lower fixed monthly payments will be far more budget friendly as well.

Should I call on a credit counseling service for help?

Not if they charge a fee for their services! There are many free credit counseling organizations. Groups such as the National Foundation for Credit Counseling, can provide service on-line, by phone or put you in touch with a local member office.

Most reputable credit counseling services will offer advice similar to what is outlined above. They will discuss your options and help you prepare a realistic budget. But you will need to do the work.

What if I’m in serious trouble with my credit cards and my credit is beyond repair?

At that stage, your options for relief may be vastly reduced but there are always options. Again, beware of the fee based credit counseling services who offer to negotiate final settlements with your creditors. You can just as easily represent yourself and negotiate the same settlements without incurring additional costs.

You’ll also need to remember, that if you do negotiate a credit card debt settlement, and if your credit card company reduced your debt or has forgiven a portion of your debt, you may be liable for federal and state income taxes on the amount that was forgiven.

Is bankruptcy a viable option?

Bankruptcy is always an option but should only be considered as a last resort and when there are a number of financial problems in addition to credit card debt. Most attorneys who specialize in these cases will tell you that bankruptcy is not considered an appropriate tool to erase a few thousand dollars in credit card debt, or even $20,000 or $30,000.

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