Military Financial Advice - Military Times

Get handle on high-interest credit cards

Do you suffer from high credit card interest rates and/or heavy debt? Millions of people do.

Consumer credit counseling, also known as "consolidation," is a rapidly growing industry, but some such services can severely damage your credit.

Counseling agencies offer to reduce interest rates and provide one place to pay. Companies also claim their services help credit. In fact, credit counseling programs are worse for credit than Chapter 13 bankruptcy (debt repayment under bankruptcy law) and sometimes are not effective in reducing interest rates at all.

But there are alternatives.

When people enter a credit counseling program, their credit reports state that they are in a structured debt repayment plan or account being paid by an agency, which is similar to Chapter 13 bankruptcy. Most mortgage lenders will not approve a loan until a person is out of the credit counseling program for at least six months. Since certain mortgage loans can be approved one day after a bankruptcy, you can see why these programs can be considered worse than bankruptcy.

Further, many of these companies are run so badly that clients suffer late payments and over-limit fees, creating rising credit card balances and causing late payments to be noted on credit reports. People with balances on some credit cards will see either minimal or no interest rate reductions while in a credit counseling program, regardless of what the agency tells them.

"Debt settlement" or "debt negotiation" programs are not much better for maintaining good credit. In this method of handling debt, people intentionally do not pay creditors, forcing those creditors to make highly discounted debt settlement offers. That's terrible for personal credit -- and not at all honorable, considering that one used the creditors' money.

Because creditors often call your workplace, it's a good idea to consult with your chain of command before entering such a program.

Large credit card companies are highly likely to sue a person in these programs six to 24 months after payments are stopped. Other creditors also sue, but less often. Lawsuits result in money judgments on your credit reports, and most people dive into bankruptcy to get out of the judgments.

You need winning strategies and battlefield tactics that will get you out of debt fast and not harm your credit reports. Let's look at other solutions:

Solution 1 involves negotiating your own interest rates to zero (or close to it) while not hurting your credit.

First, do a careful household budget including expenses that usually do not occur monthly, such as vehicle maintenance and insurance, gifts, health insurance deductibles, appliance and home repairs and dental care. Reduce entertainment, cell phone, cable/satellite and pocket money expenses and eliminate vacations to show creditors you are serious about becoming debt-free. Prepare a plan to repay the creditors as quickly as possible, including payoff dates.

Start calling creditors. Creditors will have different names for small departments that handle these issues, such as "bankruptcy prevention unit." Get a manager's name and address at each creditor. Insist on getting a manager, not a supervisor.

Write a letter to that manager explaining your situation and asking for zero percent interest. For example, say you'd like to "avoid debt elimination, bankruptcy and debt settlement" and really want to repay what you owe, but simply can't do it the way things stand.

List all your debts, include your repayment plan; provide proof of net income; and ask that your plan be approved. You want it in writing that your account will be reported "paid as agreed" at the three credit reporting agencies. Get the plan approved and signed in writing by the manager.

And stick to your agreements!

Solution 2 involves using balance transfer tactics, even if your creditors won't offer you any deals. You'll need the help of a trusted friend or relative who has good credit and low or no credit card balances.

First, have a friend or relative call his credit card companies asking for great balance transfer deals. A good deal means no balance transfer fee and no more than 3.99 percent interest for at least three months. Make at least the minimum payments on the cards belonging to whomever helps you and buy him dinner one night.

Next, transfer the balances from your cards with the highest interest rates. You need to do this only on a few cards, but try to get the balances to zero. Forty-five days later, call the credit cards with zero balances and ask for great balance transfer deals.

Whatever deals you get, transfer balances from the credit cards with high balances. Wait 45 days, and call these creditors for great deals again. Take back balances from the person who helped you.

While your rates are low or zero, pay off as much debt as you can as fast as you can. Many people successfully play balance transfer games for years. Good luck!

Dave Peters is a semiretired loan officer and credit repair specialist. He is a trustee of the nonprofit organization Credit Learning Systems, which teaches college students about credit and debt. He's author of the book "How Credit REALLY Works" and is a guest on radio shows nationwide. E-mail him at creditmatters@atpco.com.