Freezing Debt Spending
In most situations, it would be a mistake to go straight to a debt counseling agency as a first solution after credit card debt has gone out of control. There is a lot that individual consumers can do to reduce and eliminate their own credit card debt without using these services, and when these efforts are successful, consumers can often avoid suffering lower credit ratings and paying extra fees.
The first step to reducing credit card debt is to freeze the spending on the debt. While this can sometimes be easier said than done, the actual solution is simple: Stop using any and all credit cards with interest-accruing balances. If necessary, cut them up or have a trusted family member hold them for you. Change your spending habits so that you rely on cash, checks and debit cards rather than credit cards.
This step is crucial, because when credit card debt continues to pile up, it can become almost impossible to pay down.
Consolidating with Low Interest
The next step is to find a credit card or loan that offers a low interest rate, and to transfer all of the outstanding credit card debt to this account. The best account may be one that you already have open, if you have an account with a particularly low interest rate. You can also contact each of your current creditors, explain your situation and see if any of them will voluntarily lower your interest rate for you to help you pay off your debt. If you can arrange this, you should transfer all of your debt to this account.
If you find that you must sign up for a new credit card, you can often find one that offers no interest or very low interest for a term like six months or a year. If you think you can eliminate all of your debt within this term and you're sure of all the policies that apply to the account, one of these cards can offer the ideal account in which to consolidate your other debts.
Keep in mind that habitually transferring debt and juggling it from one new account to another will not go unnoticed by the credit reporting agencies, and your credit rating will suffer as a result. It can eventually cause you to fail to qualify for new credit cards. To eliminate a single instance of out-of-control credit card debt, however, it can be part of an effective strategy with little or no consequence to your credit rating.
Pay Down Debt Quickly
Now that the debt is consolidated into a low-interest account, the goal should be to pay as much as possible on that debt every month until it is gone. Make sure that you continue to avoid any new spending on the account so that you will only pay the diminishing interest.
To find creative ways of paying down the debt, write out a conservative budget for yourself. Live frugally for a few weeks or months. Try to pick up an extra shift at work, inquire about overtime opportunities, freelance on the side or even look for a part-time job for the short term. You might even consider selling items that you wouldn't mind parting with. The faster you can pay down this debt, the more you will save in the long run.
If you need assistance establishing a budget or constructing a plan to pay down the debt, you may consider hiring a financial adviser. Unlike a credit counseling service, a financial adviser will help you devise a strategy for paying down the debt as quickly as possible.
Consider Debt Counseling if Necessary
Debt counseling services should be a last resort. The reason for this is that working with debt counselors will often result in a lowered credit rating, and it can take some time to restore that good credit. Depending on the fee structure of the debt counseling service you choose, you could even end up paying as much or more than you would have by simply sticking to your budget plan.
Successful credit counseling agencies can, however, effectively negotiate with creditors to slash huge amounts off of outstanding credit. For debtors with debts that are far beyond their ability to pay, credit counseling is often the only reasonable alternative to declaring bankruptcy.
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