10 Steps to Recover From (Crushing) Credit Card Debt!

Adulting

By Faria Ahmed

Yes, you are a millennial and yes you swore to never use that credit card unless necessary and to pay back whatever you spent within a few days of swiping that card. Unfortunately, you and I both know that sometimes life happens. You fall sick and miss a few shifts at work. Things come up and your already small earnings have to be used for something other than paying back the credit card debt. And so it begins: the cycle of only paying the minimum amount due, and allowing your interest to rise. Before you know it, a year has passed and while you were chipping away at that original credit amount, a few more urgent expenses had to be made on that same card. The good news is that you are not the only one on that boat. The vicious cycle of credit card debt has sucked many of us young adults into a deep hole from which it seems nearly impossible to rise back up. The silver lining here is that it’s possible to come out of it!

Credit Card, Coins, and alcoholic beverage bottles in an artistic collage.
Photo Credit: Faria Ahmed

I myself have recovered from crushing credit card debt which I had incurred primarily on two occasions. Firstly, I went nearly three months without employment when I had finished school and was actively looking for jobs. I was working part-time at minimum wage but it was nowhere enough to let me keep up with my basic living costs. Second time, I had to get an emergency procedure done for my cat to survive. He was otherwise young and healthy and this one-time life-saving procedure cost me $3000 because I didn’t have cat insurance (that’s a story for another day). So the living expenses plus procedure cost came to about $7000 and while I was only making minimum payments, the interest charges and other costs brought it up to $10,000 in a short amount of time. 

Yes, I was 27-years old and just starting a full-time minimum wage job and I had a credit card debt of $10,000. At that point, I was trying to pay at least $200-$300 a month into that card, but my interest charges had risen to $190. So, I was basically just paying the interest amount. This is when I knew I needed a way out. 

I would feel suffocated every time I thought about that debt and what it meant. I couldn’t sleep at night whenever it popped into my mind and the only way to remain sane was by pretending it didn’t exist. Let me be very honest – pretending like it wasn’t there did nothing to solve the problem. That problem kept sitting there and growing, and instigating anxiety in me, until one day I became determined to find a way out. This is how I did it:

1. Assess the Financial Damage

The first thing you need to do is be calm, and take out all our credit cards, bank statements, etc. and make a total list of all the debt you have, on what card or cards and their respective interest rates. This will help you to figure out exactly what the total damage is and which disaster you need to manage first (i.e. which card has the highest interest rate). 

2. Measure Income & Cost of Living

The second thing you need to do is to check how much you earn each month and what is the absolute minimum that you can live on. Ideally, you will be able to cut you living costs and live extremely frugally until you have your debt paid off. This means, you need to find ways of cutting down your living cost so it is no more than half of your income.

3. Pay off Debt Proportionally

Now, use your remaining income (not used for living expenditures) and put that full amount directly into the credit card(s). If you have more than one, split it up so that more goes into the one that has the highest interest rate. 

4. Increase Your Income (& Sources of Income)

If it’s possible, try to find a job that pays more per hour even if it means a bit more work or a longer commute. Alternately, try to pick up some extra weekend and holiday shifts at work or find a second weekend job to help with additional income. Commit your full earnings from this added income to pay off your credit card debt. 

5. Borrow from Family/Spouse

I know this is not an option for a lot of people, however, if you can borrow the money to pay off your credit card debt from a family member or a friend who can afford to live without the money for a few years, it’s a good option for you considering they won’t charge you any interest. 

A dollar sign made up of Canadian coins including quarters, dimes, and twonies.
Photo Credit: Faria Ahmed

6. Liquidate Assets

I would not be selling land or an apartment. However, if you have something that is not drastically increasing in value as it sits there (like a car, a motorbike, a fancy watch collection, a branded purse collection), it may be time to give it up. Try to sell it to the highest bidder to recover as much as you can and put it towards your debt. You can even consider dipping into any savings bonds, coin collections, electronics, etc. that you think you can live without and sell it to recover cash and pay off part of your debt. 

7.Transfer to a Lower Interest Account

Often banks give offers of moving over debt that you have with departmental store credit cards, other banks and financial institutions and moving it over to your bank. This can come with incentives of offering you a reduced interest rate, or even keeping that transferred debt amount at 0% interest for 6 months or other such offers. This can allow you to have some time to catch up on your savings and be able to pay to reduce the original amount of the loan down instead of just paying the interest portion of it. Speak to your main banking institution and see if they have any such offers available. However, make sure you are going to a trusted and recognized bank, and not accepting such offers from loan sharks or small/new financial institutions. Small, new institutions may have fine print stating that once the 0% interest timespan passes, the interest may climb back up to being even more high than the original rate you had with your departmental store credit card. So, before transferring over the money, make sure you know all the information ahead of time.

8. Credit Card Consolidation

This should be a last resort. Remember that by consolidating your credit card, you are going to severely mess up your credit score. This means any loans in the near future may be more difficult to get. Having said that, if you have reached the point where the maximum amount you are putting into your credit card each month is solely paying off the interest and nothing more – it’s time to consider consolidation. What most banks do (and please go to a legitimate bank and not some loan shark), is that they will pay off your credit card and you will need to close it down immediately. Then, they will move over your loan to their institution at a much lower interest level. This means the credit card can no longer be used, to ensure you can no longer spend more. Secondly, your loan amount is now a personal loan which has automatic withdrawals from your bank account each month (usually) to pay off a minimum amount so you can pay it off in 5-10 years. While most departmental store credit cards charge an interest of 19.99-29.99%, the consolidated personal loan will charge you around 8-9%. This will allow you to pay off and chip away at the actual debt instead of just paying the interest. 

9. Loan Forgiveness/Declaring Bankruptcy

In some cities and countries, there are government loan relief grants. I have very little knowledge of them, but most of them are for large sums of loans which are about $15,000 or more in amount. You need to prove that you are unable to contribute any more of your income to pay off the debt or that you are unable to generate at income due to medical or other problems. Due to this poor financial situation, you will have to declare bankruptcy and a large portion of your loan may be forgiven or transferred over to another agency to whom you will pay a very small amount of money for a very very very long period of time. From what I have heard and read, this has a devastating impact on your credit score and any chances of becoming eligible for a mortgage or a car loan in the near future are slim to none. Compared to this, consolidated credit cards can actually allow you to eventually recover your credit score once you start paying it off. The only time I would encourage you to approach declaring bankruptcy as a solution is if you are on the verge of financial collapse and/or being chased by debt collectors. 

10. Close down your cards (But SLOWLY)

Once you begin to recover from credit card debt, it is a good idea to close down the credit cards so it doesn’t create temptation for next time. Keep any ONE credit card with a $1000 limit for emergencies and return the remaining ones once you have paid them off. However, do not close down multiple credit cards within a span of a few months as it can hamper your credit score. Spread it out over 6 months to one year.

So there you have it. There were some of the options I used myself when I came out of crushing debt of a little over $10,000. It’s difficult but it is possible and once you live life without using (or over-using) credit cards – I promise you that you will sleep so much better without financial anxiety hovering over you.

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