According to the data published on CreditSesame.com, the average Baby Boomer owns 6 credit cards. The data revealed that 3 are the usual credit cards while the other 3 are store cards. Regardless of what they are, the multiple credit cards have put pre-retirees in a difficult financial situation. The availability of credit makes the temptation to use their cards frequently. That means they are most likely owing a lot on their credit cards. The article mentioned that having too much credit available increases the temptation to use it. When you are too weak to fight that temptation, you will end up using your cards irresponsibly.
Using your credit card is not really bad. But if you abuse it, that is when the problems start coming in. This is especially true if you are about to retire. You cannot afford to rack up a huge credit card debt. This type of debt is notorious for high-interest rates. If you fail to pay it properly or you stick to the minimum payment requirement, then it will take you a very long time to completely pay it off. The chances are high that you will be retiring with debt.
Of course, the alternative to retiring with debt is to postpone your retirement. The ideal age to retire is 65 but you might have to push that back.
Options to pay off credit card balance in 5 years
Since nobody really wants to retire with credit card debt, the solution is to find a debt relief program that will help you pay off what you owe in 5 years or less.
Of course, using your retirement money to pay off your credit card balance is out of the question. According to an article published on Investopedia.com, the average retirement savings of pre-retirees who are 60 something is around $172,000. Obviously, that is not enough money to live a comfortable retirement. Even if you have Social Security, it will be very hard for you to maintain the type of lifestyle that you currently have. While it is possible to retire on a budget, that would involve sacrifices and a significant effort to downsize your standard of living. If you are not open to that idea, it is best to concentrate on getting rid of your credit card debt.
Fortunately for you, there are 2 debt relief programs that can help you get out of your credit card problems in 5 years or less.
The first option is debt management. This program actually starts as credit counseling. You will go to the non-profit credit counseling agency and you will enlist the help of a credit counselor. This debt expert will help analyze your finances and debt situation. The credit counselor will tell you what you are doing wrong and how you can correct it. After getting some debt-related tips from this expert, you have the option to go on your own and solve your debt situation.
The other option is to continue getting assistance by enrolling in their debt management program. This program involves a payment plan called a Debt Management Plan (DMP). What the counselor will do is to combine all your credit card balances and place it in one payment plan. You will discuss how much you can reasonably afford in terms of your monthly payments. Make sure that you only agree to an amount that you can afford. Otherwise, this plan will backfire on you if you fail to follow it religiously.
Once the DMP is done, it will be sent to all your creditors and the counselor will try to negotiate with them to accept this low monthly payment plan without placing your account in default. The counselor will also try to negotiate for a lower interest rate – although this will not be a guarantee.
The end result is a payment plan that will consolidate your credit card debt and allow you to lower your payments each month. This restructuring will give your budget some room for other important expenses. The length of this program will depend on how much you owe but it usually lasts for 5 years or less.
The other option that you have to get out of debt before you retire is debt settlement. This is a debt solution that will help you reduce the amount that you will pay your creditors. It can be done with or without a debt professional but that strictly depends on your ability to negotiate with your creditors.
Basically, what you will do is to tell your creditors that you are in a bad financial situation and that you are having a hard time paying off your debt. You will negotiate to pay them a lump sum amount that is lower than your credit card debt. In return, they will agree to forgive any amount that cannot be covered by that lump sum payment. You will ask them to allow you to pay pennies for every dollar. Whether they agree or not will actually depend on your ability to negotiate properly – which is why hiring a debt settlement expert is usually a good idea. If you do it correctly, you can find yourself without credit card debt in 2 years or probably even less. It can really get you out of debt fast.
How to choose between the two credit card debt solutions
The key to choose between the two is to understand your specific debt situation. However, you should also understand the similarities and differences of debt management and debt settlement so you can make a smart decision about what program to use. Both of these are great ways to get out of debt but they are more effective given the right financial situation.
Starting with the similarities between debt management and debt settlement, here are the qualities that you will find in either one of them.
- Both can get you out of debt in 5 years or less. In debt management, it is very rare that a plan will last for more than 5 years. In debt settlement, the average is around 2 years or less. The more credit card debt, the longer it will take to complete your debt payments.
- Both can help reduce your debts. This is more evident in debt settlement because your goal will be to reduce the balance that you owe. In debt management, it can be achieved if the creditor agrees to lower your interest rate.
- Both still require your payment contribution to completely get out of debt. None of these are like bankruptcy wherein you can be fully discharged of your debts. You still have to make payments – but it will be much less with debt settlement.
Now moving on to the differences, these are the unique qualities of both debt relief programs.
- Debt management will still require you to pay off all your debts. It is not like debt settlement wherein your actual balance will be reduced.
- Debt settlement can lower your credit score. The truth is, most people who enter a debt settlement program are usually in default status already – which means their score is already trashed to begin with. During the negotiation process, this is expected to go down some more. In debt management, your score will not be affected – at least, not as much as the other.
- Debt management requires a credit counselor. Debt settlement can be accomplished without the help of a debt expert. It will be harder, but it is not impossible.
If you are thinking twice about using your extra money to pay off your debt because you want to increase your retirement money, do not hesitate any longer. According to an article published on Time.com, paying off your credit card debt is a better investment because of the high-interest rate that your balance accrues. You just have to make sure that every penny is well spent and that you will choose the right debt solution to solve your credit situation.
Here are some tips that will help you know which one is the best option for you: debt management or debt settlement.
Choose debt management if:
- You have a stable income to pay off the debt. After all, there is no debt reduction. Although the credit counselor will try to negotiate for a lower interest rate, that is not a guarantee.
- You need help in organizing your debt payments. If your only problem is organizing your debt payments, debt management can help you get out of debt.
- You only want to lower your interest rate. Again, this is not a guarantee but if you can impress the creditors with your ability to stick to the Debt Management Plan, then they could relent and lower your interest.
Choose debt settlement if:
- You do not need a good credit score. As mentioned, this debt solution can lower your credit score but that is mainly because it can also reduce your balance. If you do not need a good score, then this debt solution may be worth it.
- You are struggling to meet your payments on time. If you are unable to meet the original payment amount, debt settlement is a great debt relief program.
- You are on the brink of declaring yourself bankrupt. Finally, if your credit card debt is too massive and you feel that bankruptcy is the only way out, debt settlement deserves some consideration. This is the better alternative to bankruptcy.