Tag: credit card debt

Advertiser Disclosure

Credit Cards, Featured, News

Average Household Credit Card Debt in America: 2017 Statistics

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Even as household income and employment rates are ticking up in the U.S., credit card balances are approaching all-time highs. What’s behind the growth of credit card spending among consumers? In a new report on credit card debt in America, MagnifyMoney analyzed credit debt trends in the U.S. to find out exactly how much credit debt consumers are really taking on and, crucially, how they are managing their growing reliance on plastic.

Key Insights:

  • While credit balances are increasing, the amount of debt that households are carrying from month to month is actually much lower than it was leading up to the 2008 financial crisis. As of December 2016, households with credit card debt owed an average of $8,158, down 22.9 percent compared to October 2008, when household credit card debt peaked at $10,588.
  • Credit card balances and credit card debt are not the same thing. The 73 million Americans who pay their bill in full each month have credit card balances reported to the major credit reporting bureaus.
  • Assessing financial health means focusing on credit card debt trends rather than credit card use trends.

Credit Card Debt in the U.S. by the Numbers

Credit Card Use

Number of Americans who use credit cards: 201 million1

Average number of credit cards per consumer: 2.32

Number of Americans who carry credit card debt: 125 million3

Credit Card Debt

The following figures only include the credit card balances of those who carry credit card debt from month to month.

Total credit card debt in the U.S.: $527 billion4

Average credit card debt per person: $4,2055

Average credit card debt per household: $8,1586

Credit Card Balances

The following figures include the credit card statement balances of all credit card users, including those who pay their bill in full each month.

Total credit card balances: $784 billion as of January 2017, an increase of 7.4 percent from the previous year.7

Average balance per person: $3,9058

Who Pays Off Their Credit Card Bills?

42 percent of households pay off their credit card bills in full each month

31 percent of households carry a balance all year

27 percent of households sometimes carry a balance10

Understanding Household Credit Card Balances vs. Household Debt

At first glance, it may seem that Americans are taking on near record levels of credit debt. Forty-two percent of American households11 carry credit card debt from month to month, and, if you look at the total credit card balances among U.S. households, the figure appears astronomical — $784 billion. But that figure includes households that are paying their credit debt in full each month as well as those that are carrying a balance from month to month.

While credit balances are increasing, the amount of debt that households are carrying from month to month is actually much lower than it was leading up to the 2008 financial crisis. The total of credit card balances for households that actually carry debt from month to month is $527 billion.

As of the second quarter of 2017, households with credit card debt owed an average of $8,158.3 That is a decrease of 22.9 percent compared to October 2008, when household credit card debt peaked at $10,588.12b

And as household incomes have risen in recent years, this has helped to lower the ratio of credit card debt to income. Today, indebted households with average debt and median household incomes have a credit card debt to income ratio of 14.4 percent.13 Back in 2008, the ratio was 19.1 percent.

Per Person Credit Card Debt

Once we adjust for these effects, we see that an estimated 125 million Americans carry $527 billion of credit card debt from month to month. Back in 2008, 5 million fewer Americans carried debt, but total credit card debt in late 2008 hovered around $631 billion.16 That means people with credit card debt in 2008 had more debt than people with credit card debt today.

Average credit card debt among those who carry a balance today is $4,205 per person2 or $8,158 per household.3 Back in 2008, credit card debtors owed an average of 23.7 percent more than they do today. In late 2008, the 115 million17 Americans with credit card debt owed an average of $5,567 per person12a or $10,689 per household.12b

Delinquency Rates

Credit card debt becomes delinquent when a bank reports a missed payment to the major credit reporting bureaus. Banks typically don’t report a missed payment until a person is at least 30 days late in paying. When a consumer doesn’t pay for at least 90 days, the credit card balance becomes seriously delinquent. Banks are very likely to take a total loss on seriously delinquent balances.

In the second quarter of 2010, serious delinquency rates on credit cards were 13.74 percent of all balances owed, nearly twice as what they are today. Today, credit card delinquency rates are down to 7.38 percent.14

Our Method of Calculating Household Credit Card Debt

Credit card debt doesn’t appear on the precipice of disaster, but the recent growth in balances is cause for some concern. Still, our estimates for household credit card debt remain modest.

In fact, MagnifyMoney’s estimates of household credit card debt is two-thirds that of other leading financial journals. Why are our estimates comparatively low?

A common estimate of household credit card debt is:

This method overstates credit card debt. The Federal Reserve Bank of New York/Equifax Consumer Credit Panel (CCP) does not release a figure called credit card indebtedness. Instead, they release a figure on national credit card balances. Representatives of the Federal Reserve Bank of New York and the Philadelphia Federal Reserve Bank both confirmed that the CCP includes the statement balances of people who go on to pay their bill in full each month.

To find a better estimate of credit card debt, we found methods to exclude the statement balances of full paying households from our credit card debt estimates. Statement balances are the balances owed to a credit card company at the end of a billing cycle. Even though full payers pay off their statement balance each month, their balances are included in the CCP’s figures on credit card balances.

To exclude full payer balances, we turned to academic research outside of the Federal Reserve Banks. The paper, Minimum Payments and Debt Paydown in Consumer Credit Cards, by Benjamin J. Keys and Jialan Wang, found full payers had mean statement balances of $3,412. We used this figure, multiplied by the estimated number of full payers to find the statement balances of full payers.

Our credit card debt estimate is:3

Credit Card Debt: Do We Know What We Owe?

Academic papers, consumer finance surveys, and the CCP each use different methods to measure average credit card debt among credit card revolvers. Since methodologies vary, credit card debt statistics vary based on the source consulted.

MagnifyMoney surveyed these sources to present a range of credit card debt statistics.

Are We Paying Down Credit Card Debt?

A Pew Research Center study25 showed that Americans have an uneasy relationship with credit card debt. More than two-thirds (68 percent) of Americans believe that loans and credit card debt expanded their opportunities. And 85 percent believe that Americans use debt to live beyond their means.

Academic research shows the conflicting attitude is justified. Some credit card users aggressively pay off debt. Others pay off their bill in full each month.

However, a substantial minority (44 percent)26 of revolvers pay within $50 of their minimum payment. Minimum payers are at a high risk of carrying unsustainable credit card balances with high interest.

In fact, 14 percent of consumers have credit card balances above $10,000.27 At current rates, consumers with balances of $10,000 will spend more than $1,400 per year on interest charges alone.28

Even an average revolver will spend between $58130 and $59731 on credit card interest each year.

Credit Debt Burden by Income

Those with the highest credit card debts aren’t necessarily the most financially insecure. According to the Survey of Consumer Finances, the top 10 percent of income earners who carried credit card debt had nearly twice as much debt as average.

However, people with lower incomes have more burdensome credit card debt loads. Consumers in the lowest earning quintile had an average credit card debt of $3,000. However, their debt-to-income ratio was 21.7 percent. On the high end, earners in the top decile had an average of $11,200 in credit card debt. But debt-to-income ratio was just 4.9 percent.

Although high-income earners have more manageable credit card debt loads on average, they aren’t taking steps to pay off the debt faster than lower income debt carriers. In fact, high-income earners are as likely to pay the minimum as those with below average incomes.32 If an economic recession leads to job losses at all wage levels, we could see high levels of credit card debt in default.

Generational Differences in Credit Card Use

  • Boomer consumers carry an average credit card balance of $6,889.
  • That is 24.1 percent higher than the national average consumer credit card balance.34
  • Millennial consumers carry an average credit card balance of $3,542.
  • That is 36.1 percent lower than the median consumer credit card balance.35

With average credit card balances of $6,889, baby boomers have the highest average credit card balance of any generation. Generation X follows close behind with average balances of $6,866.

At the other end of the spectrum, millennials, who are often characterized as frivolous spenders who are too quick to take on debt, have the lowest credit card balances. Their median balance clocks in at $3,542, 36.1 percent less than the national median.

Better Consumer Behavior Driving Bank Profitability

You may think that lower balances spell bad news for banks, but that isn’t the case. Credit card lending is more profitable than ever thanks to steadily declining credit card delinquency. Credit card delinquency is near an all-time low 2.34 percent.14

Despite better borrowing behavior, banks have held interest on credit cards steady between 13% and 14%37 since 2010. Today, interest rates on credit accounts (assessed interest) is 14%. This means bank profits on credit cards are at all-time highs. In 2015, banks earned over $102 billion dollars from credit card interest and fees.38 This is 15 percent more than banks earned in 2010.

How Does Your State Compare?

Using data from the Federal Reserve Bank of New York Consumer Credit Panel and Equifax, you can compare median credit card balances and credit card delinquency. You can even see how each generation in your state compares to the national median.

Median Credit Card Balance by Age (All Consumers) by State

Footnotes:

  1. Source: Survey of Consumer Expectations, © 2013-2015 Federal Reserve Bank of New York (FRBNY). “The SCE data are available without charge at www.newyorkfed.org and may be used subject to license terms posted there. FRBNY disclaims any responsibility or legal liability for this analysis and interpretation of Survey of Consumer Expectations data.”The October 2016 Survey of Consumer Expectations shows 75.02 percent of people with credit reports had balances on credit cards. The August 2017 Report on Household Debt and Credit showed 268 million adults with credit reports. For a total of 201 million credit card users.
  2. August 2017 Report on Household Debt and Credit , Page 4, Q1 2017, 453 million credit card accounts. 459 million credit card accounts / 201 million credit card users1 = 2.3 credit cards per person.
  3. The 2015 Report on the Economic Well-Being of U.S. Households reports 58 percent of credit card users carried a balance in 2015. 201 million1 * 58% = 116 million people with credit card debt.Minimum Payments and Debt Paydown in Consumer Credit Cards by Benjamin J. Keys and Jialan Wang shows that 67 percent of credit card users were not “full payers.” This results in a high estimate of 135 million people with credit card debt.

    Average estimate is 125 million with credit card debt.

  4. Using data from the 2015 Report on the Economic Well-Being of U.S. Households, 201 million credit card users * (58 percent not full payers) * $4,262 per individual5 = $496 billion in credit card debt.Using data from Minimum Payments and Debt Paydown in Consumer Credit Cards by Benjamin J. Keys and Jialan Wang, we calculate 201 million credit card users * (67 percent not full payers) * $4,148 per individual5 = $558 billion in credit card debt.

    Average estimated total credit card debt is $527 billion.

  5. The August 2017 Report on Household Debt and Credit shows $784 billion in outstanding credit card debt. Table A-1 in Minimum Payments and Debt Paydown in Consumer Credit Cards by Benjamin J. Keys and Jialan Wang shows an average balance of $3,412 for “full payers.” Using their estimate of 33 percent full payers, we calculate:[$784 billion – ($3,412 (full payer balance) * 33% full payer * 201 million credit card users1)] / (201 million credit card users * (100% – 33% not full payers)) = $4,148

    Using their estimate of 42 percent full payers, from the 2015 Report on the Economic Well-Being of U.S. Households and the $3,412 full payer balance from Table A-1 in Minimum Payments and Debt Paydown in Consumer Credit Cards by Benjamin J. Keys and Jialan Wang, we calculate:

    [$784 billion – ($3,412 (full payer balance) * 42% full payer * 201 million credit card users1)] / (201 million credit card users * (100% – 42% not full payers)) = $4,262

    Average estimated credit card debt per person is $4,205.

  6. Average per person credit card is $4,2055 and the average household contains 1.94 adults over the age of 18. $4,205 * 1.94 = $8,158.
  7. August 2017 Report on Household Debt and Credit, Compare Q2 2016 to Q2 2017, outstanding credit card debt (Page 3).
  8. August 2017 Report on Household Debt and Credit, Page 3, Q2 2017, credit card debt $784 billion / 201 million1 = $3,905.
  9. 2016 State of Credit Report” National 2016 Average Balances on Credit Cards, Experian, Accessed May 24, 2017. National Balance on Bankcards — average of $5,551.
  10. Page 30, 2015 Report on the Economic Well-Being of U.S. Households.
  11. 2013 Survey of Consumer Finances reports 37.1 percent of U.S. households carry credit card debt. There are 125.82 million U.S. households.Meta Brown, Andrew Haughwout, Donghoon Lee, and Wilbert van der Klaauw reported that 46.1 percent of U.S. households carried a balance the month prior to the Survey of Consumer Finances.

    Between 48 million14 and 58 million15 households carry credit card debt. Using the average of the two estimates, we believe 53 million households out of 125.82 million households carry credit card debt.

  12. a. CCP data shows 76.6 percent of people with credit reports had balances on credit cards in September 2008. The May 2017 Report on Household Debt and Credit showed 240 million adults with credit reports in Q3 2008. For a total of 183 million credit card users.The August 2017 Report on Household Debt and Credit shows $866 billion in outstanding credit card debt in Q3 2008. Table A-1 in Minimum Payments and Debt Paydown in Consumer Credit Cards by Benjamin J. Keys and Jialan Wang shows an average balance of $3,412 for “full payers.” Using their estimate of 33 percent full payers, we calculate:

    [$866 billion – ($3,412 (full payer balance) * 33% full payer * 183 million credit card users)] / (183 million credit card users * (100% – 33% not full payers)) = $5,365

    U.S. Census Bureau, Survey of Income and Program Participation, 2008 Panel, Wave 4shows 44.5 percent of all households with a credit report have credit card debt. Using this along with the $3,412 full payer balance from Table A-1 in Minimum Payments and Debt Paydown in Consumer Credit Cards by Benjamin J. Keys and Jialan Wang, we calculate:

    [$866 billion – ($3,412 (full payer balance) * (100% – 44.5%) full payer * 240 million people with credit reports)] / (240 million people with credit reports * (44.5% not full payers)) = $5,769

    Average estimated credit card debt per person is $5,567.

    b. Average per person credit card is $5,56712a and in 2008, the average household contained 1.92 adults over the age of 18. $5,567 * 1.92 = $10,689.

  13. U.S. Bureau of the Census, Real Median Household Income in the United States [MEHOINUSA672N], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/MEHOINUSA672N, September 6, 2017.
  14. August 2017 Report on Household Debt and Credit , Page 12, % of Total Balance 90+ Days Delinquent, Credit Cards
  15. Statement balances are the balances owed to a credit card company at the end of a billing cycle. Full payers will pay off the entirety of their statement balance each month. Finding an estimate of full payers” statement balances was not an easy task. The Federal Reserve Bank of New York does not provide estimates of full payers compared to people who carry a balance.In order to get our estimates, we turned to academic research outside of the Federal Reserve Banks. In the paper, Minimum Payments and Debt Paydown in Consumer Credit Cards by Benjamin J. Keys and Jialan Wang, we found robust estimates of the statement balances of “full payers.” According to their analysis (see Table 1-A), full payers had mean statement balances of $3,412 (when summarized across all credit cards) before they went on to pay off the debt.

    We multiplied $3,412 by the estimated number of full payers to get the estimated balances of full payers.

  16. CCP data shows 76.6 percent of people with credit reports had balances on credit cards in September 2008. The May 2017 Report on Household Debt and Credit shows 240 million adults with credit reports in Q3 2008. For a total of 183 million credit card users.The May 2017 Report on Household Debt and Credit shows $866 billion in outstanding credit card debt in Q3 2008. Table A-1 in Minimum Payments and Debt Paydown in Consumer Credit Cards by Benjamin J. Keys and Jialan Wang shows an average balance of $3,412 for “full payers.” Using their estimate of 33 percent full payers, we calculate:

    $866 billion – ($3,412 (full payer balance) * 33% full payer * 183 million credit card users) = $659 billion

    U.S. Census Bureau, Survey of Income and Program Participation, 2008 Panel, Wave 4shows 44.5 percent of all households with a credit report have credit card debt. Using this along with the $3,412 full payer balance from Table A-1 in Minimum Payments and Debt Paydown in Consumer Credit Cards by Benjamin J. Keys and Jialan Wang, we calculate:

    $866 billion – ($3,412 (full payer balance) * (100% – 44.5%) full payer * 240 million people with credit reports) = $587 billion

    Estimated credit card debt is $623 billion.

  17. Source: Survey of Consumer Expectations, © 2013-2015 Federal Reserve Bank of New York (FRBNY). “The SCE data are available without charge at www.newyorkfed.org and may be used subject to license terms posted there. FRBNY disclaims any responsibility or legal liability for this analysis and interpretation of Survey of Consumer Expectations data.”The October 2016 Survey of Consumer Expectations Shows 75.02 percent of the adult population uses credit cards. The August 2017 Report on Household Debt and Credit shows 267 million adults with credit reports. For a total of 201 million credit card users. Page 30, 2015 Report on the Economic Well-Being of U.S. Households shows that 58 percent of households with credit cards sometimes or always carry a balance.

    201 million * 58% = 116 million people with credit card debt

  18. Source: Survey of Consumer Expectations, © 2013-2015 Federal Reserve Bank of New York (FRBNY). “The SCE data are available without charge at www.newyorkfed.org and may be used subject to license terms posted there. FRBNY disclaims any responsibility or legal liability for this analysis and interpretation of Survey of Consumer Expectations data.”The October 2016 Survey of Consumer Expectations Shows 75.02 percent of the adult population uses credit cards. The August 2017 Report on Household Debt and Credit shows 267 million adults with credit reports. For a total of 201 million credit card users. Minimum Payments and Debt Paydown in Consumer Credit Cards by Benjamin J. Keys and Jialan Wang shows that 67 percent of credit card users were not “full payers.”

    201 million * 67% = 135 million people with credit card debt

  19. The 2013 Survey of Consumer Finances reports 37.1 percent of U.S. households carry credit card debt. There are 125.82 million U.S. households.
  20. Meta Brown, Andrew Haughwout, Donghoon Lee, and Wilbert van der Klaauw reported that 46.1 percent of U.S. households carried a balance the month prior to the Survey of Consumer Finances.
  21. The 2013 Survey of Consumer Finances reports a median credit card debt of $2,300 per household with credit card debt.
  22. Meta Brown, Andrew Haughwout, Donghoon Lee, and Wilbert van der Klaauw used CCP data and determined a more realistic median credit card debt of $3,500 per household. Two-person households systematically underreported their debt.
  23. The 2013 Survey of Consumer Finances reports a median credit card debt of $5,700 per household with credit card debt.
  24. Meta Brown, Andrew Haughwout, Donghoon Lee, and Wilbert van der Klaauw used CCP data and determined a more realistic average credit card debt of $9,600 per household.
  25. The Complex Story of American Debt, Page 9.
  26. Table 1 in Minimum Payments and Debt Paydown in Consumer Credit Cards.
  27. Recent Developments in Consumer Credit Card Borrowing.
  28. Board of Governors of the Federal Reserve System (US), Commercial Bank Interest Rate on Credit Card Plans, Accounts Assessed Interest [TERMCBCCINTNS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/TERMCBCCINTNS, September 7, 2017.May 2017 interest rate on accounts assessed interest 14%: $10,000 * 14% = $1,400.
  29. Table 1 in Minimum Payments and Debt Paydown in Consumer Credit Cards.
  30. $4,1482 * 14%28 = $581
  31. $4,2622 * 14%28 = $597
  32. Minimum Payments and Debt Paydown in Consumer Credit Cards.
  33. 2013 Survey of Consumer Finances.
  34. 2016 State of Credit Report” National 2016 Average Balances on Credit Cards, Experian, Accessed May 24, 2017. Average credit card balance for baby boomers is $6,889 compared to a national average of $5,551.
  35. 2016 State of Credit Report” National 2016 Average Balances on Credit Cards, Experian, Accessed May 24, 2017. Average credit card balance for millennials is $3,542 compared to a national average of $5,551.
  36. Board of Governors of the Federal Reserve System (US), Commercial Bank Interest Rate on Credit Card Plans, Accounts Assessed Interest [TERMCBCCINTNS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/TERMCBCCINTNS, September 7, 2017.
  37. U.S. Bureau of the Census, Sources of Revenue: Credit Card Income from Consumers for Credit Intermediation and Related Activities, All Establishments, Employer Firms [REVCICEF522ALLEST], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/REVCICEF522ALLEST, September 7, 2017.
  38. CCP data shows 76.6 percent of people with credit reports had balances on credit cards in September 2008. The May 2017 Report on Household Debt and Credit shows 240 million adults with credit reports in Q3 2008. For a total of 183 million credit card users.The May 2017 Report on Household Debt and Credit, Page 3, Q3 2008, credit card debt $886 billion / 183 million = $4,720
  39. State Level Household Debt Statistics 1999-2016, Federal Reserve Bank of New York, May, 2017. All average credit card debt balances are calculated using the following formula:(Total Credit Card Balancea – Balance of Population Not Carrying Debtb) / Population Carrying Credit Card Debtc
    1. Total Credit Card Balance = (Average Credit Card Debt Per Capita * Population)
    2. Balance of Population Not Carrying Debt = Average Credit Card Debt Per Capita * Population * % of Population Using a Credit Card
    3. Population * % of Population Using a Credit Card * (1 – .375)
  40. State Level Household Debt Statistics 1999-2016, Federal Reserve Bank of New York, May, 2017.
  41. Data from Consumer Credit Explorer.
Hannah Rounds
Hannah Rounds |

Hannah Rounds is a writer at MagnifyMoney. You can email Hannah at hannah@magnifymoney.com

TAGS:

Advertiser Disclosure

Featured

Use the $20 Rule to Break Your Credit Card Addiction

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

 

Credit Cards

If you’re trying to break your credit card addiction, try this simple rule of thumb: Anytime your purchase is less than $20, pay cash, not credit.

This simple technique helped save more than 6,000 people over $100 on their credit card bills, according to a joint study by the Urban Institute, Arizona Federal Credit Union and the Doorways to Dreams Fund, a nonprofit financial services organization.

Carrying credit card debt can be one of the most harmful financial habits out there, yet 41.7 percent of Americans carry balances from month to month, according to the American Bankers Association. When you carry a balance from month to month, not only are you stuck paying additional interest charges but it can also be harmful to your credit score.

These groups sought to figure out if people were less likely to carry a balance if they tried one of two strategies: Either they were reminded not to use credit for any purchases under $20, or they received alerts warning them that carrying a balance can add an additional 20% to their purchases with interest.

For the study participants, the researchers chose over 14,000 consumers who carried a balance for at least two months within a six month period. Then they split them into three test groups: one group used the $20 rule; one group received the warnings about accruing interest on debt; and the last group did nothing differently.

The second strategy (warnings about revolving debt consequences) wasn’t as successful, creating no significant changes in spending behavior.

But the first strategy — the $20 rule — made a real impact.

Over 6,100 people used the $20 rule for six months. Over that time, they reduced their balance by an average of $104.20.

The trick to why the $20 rule worked is that it helped people change their spending behavior, said study author Brett Theodos, a lead researcher at Urban Institute. The point of the rule, he added, was to reduce frivolous spending among consumers, rather than focusing on encouraging them to make monthly payments.

It’s those spending patterns — using credit for everything from a pack of gum to a flight to L.A. — that result in high revolving credit balances over time.

“The [$20 rule] was more actionable. It was a very clear target,”  Theodos said.

Both rules worked better with consumers under age 40 and for consumers who used their credit card most often (10 or more times a month). Theodos said it’s possible that the groups were “more tech-engaged and took more advantage of the emails and web banners in particular.”

The under-40 consumers who tried the $20 rule reduced their revolving debt by $173 on average over six months. Overall, they reduced their debt by up to 5%, according to the study. When using the second strategy (those frequent alerts and notifications) they shaved $160 off their average revolving debt. Study participants in the 40 to 60 age range didn’t see a significant change in balance reduction, however those over 60 did cut back debt by roughly 3 percent.

The key takeaway: Using action-oriented strategies may be a smart way to work your way out of credit debt. It’s certainly worked successfully for savings. For example, the $5 savings method involves on a similar strategy. The idea is to begin saving every $5 bill that you receive. It helped one woman save thousands of dollars over several years.

“Rules, tips reminders, nudges, are really the wave of the future,” Theodos said.

Brittney Laryea
Brittney Laryea |

Brittney Laryea is a writer at MagnifyMoney. You can email Brittney at brittney@magnifymoney.com

TAGS: ,

Advertiser Disclosure

Consumer Watchdog, Pay Down My Debt

When and How to Settle Credit Card Debt

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Very Upset Woman Holding Her Many Credit Cards.

Are you drowning in a sea of credit card debt, have collection agencies hounding you, and have no idea what to do because you can’t pay your balance?

There’s a light at the end of the tunnel you’re in, and it’s not declaring bankruptcy. You can settle your credit card debt for much less than what you owe, but it will involve some negotiating and standing your ground.

The advice contained here is for those with credit card debt that is already in collections. In this situation, you’re no longer dealing with your original creditor because they’ve sold your debt off to a collection agency.

This usually happens once you’re 150 days past due on a payment. At this point, you should have received a letter from the collection agency with the details of the debt it’s trying to collect on, or a phone call explaining the situation. If you haven’t received written notice, request it so you’re crystal clear on what the collection agency is asking you for.

Read on to find out how you can handle settling your credit card debt without having to pay more than you can afford.

Figuring Out How Much You Can Pay

You might not want to hear this, but collection agencies aren’t going to stop calling unless you pay something. It doesn’t have to be (and won’t be) for the full amount you owe, but considering the collection agency purchased your debt, it wants to make a profit.

The first step in creating a plan to settle credit card debt is to figure out how much you can afford to pay. If you can’t pay much, save what you can as every bit helps.

Set aside time to review your spending. If you already have a budget, look to see where you can cut expenses to put more money toward savings. Is it possible to earn extra money outside of your day job, or work overtime for the next few months?

Be realistic. If you can only save $150 per month right now, that’s all you can afford to save. You don’t want to make payment promises to a debt collector that you can’t keep. Save as much as you possibly can every month until you have enough to make an offer to the collection agency. We recommend having at least 20% of the balance you owe saved up before doing this. For example, if you owe $10,000, then save up $2,000.

You should also know that collection agencies can come after you if you don’t pay. If you earn a decent income or have significant savings, you’ll want to protect yourself. They can garnish your wages, seize your assets, and in some cases, can go after your retirement accounts. Nolo has more details here, but if your retirement plan is set up under the Employee Retirement Income Security Act (ERISA), then it should be safe.

Making the Offer to the Collection Agency

Here comes the hard part. If you’ve been on the phone with the collection agency previously, they probably told you that you had to pay the full amount of the balance you owe. It’s their job to scare you into thinking this is your only option.

If you haven’t made contact yet, be ready. The important thing is hold your ground. Say you can’t afford to pay the balance in full. The collector will likely come down, asking if you can pay around 80% of the balance you owe.

Your job is to hold steady until you can meet in the middle, at the amount you have saved up. If they ask you what you can pay, don’t name the actual amount you’ve determined you can pay. Go lower. Chances are you’ll have to negotiate up to that amount. You don’t want to settle on an agreement for more money than you have.

You’ll typically have an easier time negotiating if you can pay the balance all at once, but if you can only offer to make monthly payments right now, see if the collector will agree.

If they aren’t willing to accept what you have to offer the first time around, don’t get discouraged. Continue saving what you can, and when they call you back (or you call them), tell them how much more you can pay. Consider asking the person you’re dealing with how long they’ve had your account for – the closer the date, the more flexible they might be. They don’t want to lose your account if you’re willing to pay.

Additionally, don’t let them pressure you into making an upfront payment. It could lessen your negotiating power. You shouldn’t be giving the collection agency a cent until you settle on an agreement and get the agreement in writing.

Do you need help knowing how to word your response to debt collectors? If you think they’re in the wrong (and you don’t owe the debt), or if you want them to contact you in a certain way, the Consumer Finance Protection Bureau offers sample contact letters here.

Get the Offer in Writing

Hopefully you’re able to reach a settlement for the amount you have saved. Once you reach that settlement, you must get it in writing. A verbal agreement means nothing if the collector ever decides to sue you. You need proof, especially if it’s requested by the credit bureaus.

Any time you speak with a collector you should be keeping strict records of everything that was said. You want to be able to document all communication you had with them. It’s not their responsibility to do this. The only thing they care about is getting your money. If it’s legal to record phone calls in your state, you can do that, too.

Once you settle on an agreement, ask the collector if they can provide you with an agreement letter. If they aren’t willing to do that, you should draft your own. There are many helpful examples if you search for them, but this is a good template to follow. In general, you want to make sure the following details are contained in this letter:

  • The date the agreement is valid until (many offers expire after 30 days – you want to make sure you pay before then)
  • The amount you must pay
  • The correct agency name, especially if your debt has been sold multiple times
  • The exact debt(s) your money is going toward (be as specific as possible; include account numbers, dates, and name institutions)
  • Instructions for the agency – if it accepts the payment, that means the balance is paid in full and it can’t contact you about it again or place it on your credit report again
  • Credit history reporting – depending on what the collector agreed upon, this could be deletion of the mark from your credit history (pay for delete) or “paid in full” status

How to Pay

You might think the best way to pay is to fork over the cash, or write a personal check. We wouldn’t recommend either of those options. Cash isn’t traceable, and personal checks give the collection agency your bank and routing number.

Instead, pay by cashier’s check or money order. Keep in mind paying with a money order may make it difficult to prove that you paid.

If it’s not too much of a hassle (and you don’t trust the collection agency), you can open a “throw-away” account that won’t charge overdraft fees like Bluebird and use a check from that account. Close it once the payment goes through. This gives you peace of mind knowing your regular accounts are safe.

When sending the payment, send it via certified mail return receipt requested.

Is Your Debt Expired?

Before you even contact the collection agency, you’ll want to check if your credit card debt is within the statute of limitations for your state. If you make any sort of payment toward an old debt, or acknowledge that you owe it, then that debt becomes active again and you open yourself up to the possibility of a lawsuit.

The statute of limitations on consumer debt varies from state to state and it may be a good idea to speak with an attorney if you can afford to.

Beware of Possible Tax and Credit Implications

When you settle credit card debt for an amount less than what was originally owed, you may have to pay income tax on the difference. This is because the IRS treats the amount that was forgiven as gained income.

It’s best to consult a tax professional and let them know about your situation. According to Nolo, if the amount forgiven was over $600, the debt collector is required to report it to the IRS and send you Form 1099-C so you can report the income. If you don’t receive this form from the collector, that doesn’t excuse you from reporting it. However, there are exceptions, which is why you should let a tax professional help you figure out if you need to take action.

Another factor to consider in the aftermath of your credit card debt being settled is your credit score and history. How will they be affected? Paying a portion back is better than ignoring your debts, but your credit score may still suffer. As we mentioned, you should include specific instructions for your debt collector to list the debt as “paid in full” on your credit report – you don’t want it to say “settled” as that looks worse.

In some cases, the debt collector may not have the authority to make changes to your credit report, especially if you want the account deleted. You may have to contact the original creditor. You can ask the debt collector for that information, and then ask the original creditor if they’ll consider deleting the account from your report. Make sure you have a good explanation – tell them you’re trying to get your finances in order by repaying old debt, and want to start fresh.

Getting Help With Your Debt

Be very wary of accepting help from a debt settlement company. Many are for-profit and unethical, taking fees out of your payments and negotiating with collectors when you can do the same for free. It will likely end up costing you more money to have their assistance.

If you’re having trouble managing any other debt you have, a consumer credit counseling company could be the right move for you. We have a list of the best we recommend that won’t charge you an arm and a leg for their services. They can help you create a budget and a debt repayment plan, as well as advise you on how to improve your credit score.

Alternatively, you can check out our free guide to getting out of debt. We know dealing with collection agencies and old debt isn’t fun, but you’ll feel relieved once this process is over with. The worst thing you can do is completely ignore your debts as the bad marks on your credit won’t fall off your history for another seven years. Most people can’t wait that time out. Good credit is valuable to have, and there’s no better time to start working toward it than right now.

Erin Millard
Erin Millard |

Erin Millard is a writer at MagnifyMoney. You can email Erin at erinm@magnifymoney.com

TAGS: ,

Advertiser Disclosure

Balance Transfer, Pay Down My Debt

How to Use a Balance Transfer to Attack Your Debt

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Screen Shot 2015-02-03 at 1.30.44 PM

Below is an excerpt from our Debt Free Forever Guide. Be sure to download the free guide to help dump debt for good.

Using a balance transfer to attack can help slash your interest rates and save you time and money. You are eligible for a balance transfer if:

  • You have good credit. Your score is likely above 700.
  • You are not behind on any of your payments.
  • You have a debt burden well below 50%.
  • Your debt is well below 50% of your annual income

In this post, we’ll walk you through deciding if a balance transfer is right for you and how to pick one.

Make a List of Your Debt, from Highest to Lowest Interest Rate

In this exercise, you will need to make an inventory of your credit card debt. Your most recent billing statement will have all of the information required. On the list, you will need to include:

  • Your total statement balance. If you only made purchases on your credit card, you only need to include the statement balance. However, if you have taken out a cash advance or have a promotional (for example 0%) balance on the card, you should list each balance separately. The balance by each category is usually listed towards the end of the statement, under a section call “interest charges.” In the example below, you can see that each balance is listed separately:

BT image - interest

  • Your Annual Percentage Rate (APR): As you can see in the example above, there are very different interest rates depending upon whether you have a cash advance or a purchase. You will want to list each balance separately, with each APR listed separately.
  • The issuing bank: You will need to determine which bank issued your credit card. For most credit cards, it is obvious. However, for some store credit cards it is not always clear. Your statement will almost always identify the “issuing bank.” If you cannot determine which bank issued your credit card, just call customer service and ask them. Once you have all of this information gathered, you can complete the list of your balances, from highest to lowest interest rates. Below is an example:

BT example

 

As you can see in the example below, this individual has $10,000 of credit card debt. The interest rates range from 29% (the cash advance on Citi) to 0% (a promotional purchase offer from Chase).

The 16.65% is the blended interest rate, which we calculated. That means that the individual is paying an average of about 17% across all of the debt.

Use MagnifyMoney to find a balance transfer offer

Now that you have an inventory of your total debt, you can come up with a strategy for transferring that debt to a lower interest rate. Here at MagnifyMoney, we review thousands of offers, and update the best deals every day. You can visit

MagnifyMoney’s balance transfer table to find the best deals.

When you look to find a balance transfer, just remember:

  • If you have a balance at 0%, you should not transfer that balance until the end of the promotional period. If it is at 0%, keep it there.
  • You can only transfer debt to a different bank. So, you could never transfer Citibank debt to another Citibank credit card. In the example we had above, $2,000 of the $10,500 is already at 0%. So, we are looking to transfer $8,500 of debt to a lower interest rate. In order to use the balance transfer tool, you need to know how much you can actually afford to pay each month towards that debt. Let’s say that you can afford to pay $300 per month towards the $8,500 of debt. In summary, you are looking to transfer $8,500 of debt, at an average interest rate of 20% (remember, we excluded the debt you already have at 0%), and you can afford to pay $300 per month. We have input this information into the balance transfer tool, and here are the results:

Screen Shot 2015-02-09 at 1.47.52 PM

 

The results show a number of excellent options, which can help save you a lot of money. (We are only displaying the first 3 results – there are many more).

Here is how we present the results:

  • Savings: we rank the results based upon savings. The transfer deal that offers the most savings is at the top. This will tell you how much less interest you will pay during the balance transfer period, compared to your current situation.
  • Transparency Score: the more fine print a credit card has, the higher the chance that you can end up paying hidden fees or charges. We look at all the fine print, and grade cards based upon their simplicity. The best cards get an A, the worst cards get an F.
  • Offer Terms: we then show you the key features of the offer, which includes the balance transfer fee and the promotional interest rate (including how many months the promotional offer would last). The top 3 results are all from credit unions (FCU = Federal Credit Union). That means you would have to join the credit union, and then apply for the credit card. The fourth result, from Santander, does not require you to join a credit union. When you make a decision about which credit union or bank to select, you should consider:

Is the savings the most important element to you? If you are looking to save the most amount of money, regardless of any other element, than you would probably want to choose the first result.

  • Do you want to support local credit unions? The downside of a credit union is that you have to join first, and then apply for the credit card. This can take extra time. Some credit unions make it very easy, but others make it a bit more of a challenge. Do you only want to reward cards that have an A transparency score? At MagnifyMoney, our goal is to reward simpler, more transparent cards with fewer hidden fees. We hope that our transparency score becomes a part of your decision-making process.

Regardless of which card you choose, you will end up saving a lot of money. You can see that the Top 3 cards have savings ranging from $2,156 to $2,384. So – you know that you will be better off after a balance transfer.

What you need to understand about a balance transfer

  • Life of Balance deals: if you see an offer that lasts for the “life of the balance” that means the promotional offer expires once you pay off the balance, and not before. Those are great deals.
  • Just because one credit card company rejects you, doesn’t mean that they will all reject you. Every bank and credit union has its own unique underwriting criteria. We wish it was easier, but banks don’t like to share their approval criteria. In our experience, we have seen many people approved by one company but rejected by another – and the reason for the difference is not always clear. You are reading this section because you are likely to be accepted, but you are not guaranteed.
  • Every application will take about 10-20 points off your score. If you are not applying for an auto loan or a mortgage in the next year, you should not be afraid of applying to multiple credit card companies. Just keep applying until you have been able to move the majority of your credit card debt from high interest rates to low interest rates. We have helped a lot of people using balance transfers, and they rarely were able to get all of their debt transferred to one credit card. And many people are approved by one bank but rejected by another.
  • You will not always get the credit limit that you want. Even if you are approved, you may be approved for a credit limit that is much lower than you wanted/expected. That is OK. Remember – even a lower credit limit will still help you save money. If you are given a lower limit than you want, don’t be afraid to call the bank and ask them to reconsider your credit limit. That can often work. But, if it doesn’t, don’t be afraid to apply for a few other cards to transfer the debt.
  •  Fears about your credit score should not keep you from saving money. The purpose of a good credit score is to use it to save money. Remember, applying for new credit is only 10% of your credit score. Much more important is utilization and on-time payment behavior. So long as you keep your old credit cards open after you transfer the balance, you should expect to see an even better score than you have now in 6-12 months, because you will be paying off your debt more quickly and will have a lower credit utilization.

Once you decide which credit card makes the most sense for your needs, you just need to click on “Apply Now.” That will take you to the credit union or bank website, where you can complete the application process. If you ever feel stuck or confused, you can always call the bank directly to complete the application process.

Download our Debt Free Forever Guide! It’s FREE and will help get you back on track.

debt-free-thumbnail

Nick Clements
Nick Clements |

Nick Clements is a writer at MagnifyMoney. You can email Nick at nick@magnifymoney.com

TAGS: , , ,