So you're over the limit on your credit card. You're also behind on your payments and the debt is piling up. Each month you're paying your credit card bill(s) late and the late charges are racking up. Instead of your balance going down each month, it is going up and to top it all off your credit score is getting destroyed as you keep getting late pays reported on to the credit bureaus.
Does this sound familiar? Let's finish the painting the picture. You owe so much to the credit card company(ies) that you don't see a way out. Your credit score eventually goes in the tank, the credit card company (bank) keeps harassing you daily with phone calls and what was once a manageable set of credit card bills is now an out of control financial and personal nightmare.
If any part of this sounds familiar, you are probably looking for a way out of this situation. First, don't worry and don't feel like you're alone. Millions of Americans are in this same situation and the banks like vultures are feasting on the collective financial carcasses, stripping every ounce of your cash they can get with the added fees and interest rate hikes.
There are some things you can do to get out of this situation, and most of them may be strategies that go against many of the things you have been programmed to believe. Outside of filing bankruptcy (which we will cover in a follow up article), the simplest way to extricate yourself from this situation is to simply stop paying your credit card bill(s).
The first and most important thing you need to know about banks is that as long as you are willing and able to pay late fees and overdraft fees the bank will keep charging you with them.
A portion of every single $49 late fee goes directly to the banks profit line as long as you pay it so why would the bank stop charging it?
A bank makes much more profit off a 20% interest rate loan than a 5% interest loan so why would they want to reduce your interest rate?
Technically, being over your credit limit costs a bank NOTHING, but why would they not charge you an over the limit fee when the over the limit fee is essentially free money for the bank?
The answer to these questions is simple. The only way these banks will stop charging you these fees is if you stop paying the fees.
Once you stop paying your credit card bills the bank gets worried that they won't get their money. They will start off with the sporadic "courtesy call" reminding you to send in your payment, but once you fall behind a few weeks those occasional "courtesy calls" turn into daily harassment. Fall a few months behind and the bank will get very worried about their money and in addition to calling you daily they may send you threatening letters and even call your friends and relatives. They are escalating their pressure for 2 primary reasons:
1. Because scaring people into paying their bills (along with the additional fees) works
2. You may decide that you won't pay at all and the bank will get nothing
Continually paying your bill based on Reason 1 when you are financially strapped will eventually lead you to the scenario we described in the first paragraph. When you have some long term financial trouble (you lost your job, your pay was cut, you made bad decisions, etc.) Option #2 is a much better solution.
After 60 days of not paying your credit card bill a bank will really get worried that you may actually not pay them - ever. Once they realize this is a possibility, the bank will give up on their initial game of "chicken" and try a calmer and gentler approach. As of April 2009 and according to some action by the NFCC, most major banks will offer you a "Debt Management Plan" to reduce your payments and lower your interest rate. The Debt Management Plan (depending on your bank) will go something like this.
The bank will lower your interest rate from the ridiculous fee you may be paying now (anywhere from 15 - 30%) to a market rate (around 4.5%)
The bank will lower your monthly payment (anywher from 10 - 40%) primarily based on the lower interest rate.
The bank will not force you to pay the total past due balance (which could be multiple months). Instead they will start you off with the new payment and remove the responsibility of catching up on late payments.
The bank will immediately stop charging late fees once the plan is approved.
After a set period of paying according to the workout plan (3-6 months) your account will be in good standing again and your total debt should be paid off within 60 months.
This all may sound too good to be true - but it is not. It may also seem blatantly unfair to the people who struggle to pay their bills on time - and it is. Banks do not care about being fair, they only care about getting their money and if the workout plan is the only way they can get back the money you owe them then that is the strategy they will employ. Simply endure the harassment for 3 months or so and give the relationship manager of the bank a call. Tell them you need a workout plan or you will file bankruptcy and the bank won't get a dime. They know you're serious because you are way behind already, this is a terrible economy, and there are millions of other Americans in the exact same situation. Your only responsibility is to follow the plan repayment schedule and watch your life slowly get back to normal.
Debt Management Plans are not available for people who are marginally behind (between 15 and 60 days) on their credit card bill(s). It is too easy for the bank to make additional money on late / overdrafts fees on these people. The struggling worker trying to do the "right thing" is therefore penalized with fees and no options. Debt Managment Plans are only available to people who essentially stop playing the banks game and refuse to pay for several months - forcing the bank to try to get thier money another way.
As long as you are able AND WILLING to pay late fees and overlimit fees the bank will continue to charge them. Stop paying them and the bank will be forced to renegotiate with you.
Major banks are corporations that exist to make money for themselves and their shareholders - period. Banks DO NOT exist to help you make money or to help you save money.
Banks are in complete control of the interest rate you pay on a credit card. Their power to raise or lower your nterest rate is INDEPENDENT of your FICO credit score.
Faced with a choice of getting nothing (a consumer walking away from a loan) or charging you usurous fees and interest, all banks will choose to give up the fees and take a reasonable payment.
If your credit is already shot because of late pays on your credit report, there is absolutely no downside to waiting the bank out to get them to offer you a workout plan. Use the money you would have given the bank for late fees and pay some other bills.
If you want to read more about the inception of major bank adoption of Debt Management Plans read this April 2009 press release from the National Foundation of Credit Counseling (NFCC).
If you really don't want to play the bank's game anymore, check out our article on Filing Bankruptcy - How to Reboot Your Finances.
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