Credit cards are a huge problem in the U.S. A May 21st New York Times article reported that the Standard & Poor’s/Experian Consumer Credit Default Indices shows that the default rate on credit card loans recently climbed to its highest point, 9.14 percent, since the index first began in 2004.

So more people are no longer paying their credit card bills. What are those people who’ve stopped paying on their credit cards doing about their credit card debt?

Hopefully, they’re not paying a debt settlement company to try and “get out of debt.” There are a few cases where using a debt settlement company may be appropriate, but not many. Many debt settlement companies take large fees and tell you to stop paying on your credit card bills. They take monthly payments from you for a long time. Then they make offers to your credit card companies to settle your debts.

Sound like something you can do by yourself without paying the high fees? Yeah, there’s a reason for that – it is.

But many people who are taking the debt settlement route should consider bankruptcy instead. If you’re thinking about pursuing the debt settlement route, ask yourself, “why did I decide that bankruptcy wasn’t for me?” Was it fear? A belief that bankruptcy is too difficult?

You owe it to yourself – and your financial health – to first take the time to do some research. Look around online. The bankruptcy courts have their own websites with plenty of information for potential filers. It can’t hurt you to take the time to educate yourself. You need to know what the potential benefits of bankruptcy are before you commit to the high fees charged by a debt settlement company.

Photo by Alan Cleaver.

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Truth is, the best way to “manage” credit cards is not to carry a balance at all. Don’t spend more than you can afford. Pay off the entire balance at the end of every month.

But you will find advice out there about how to pay down credit-card balances and keep ahead of the game, as though everyone were in an equal starting position in a game of Monopoly. Some of this advice may be right for you if you can afford it and if it will successfully lead you to a goal of getting all your credit card debt paid off.

Unfortunately, people often don’t realize, until they’ve made even worse financial mistakes, that the advice they tried to follow to pay down on their credit-card debt or to pay it off just wasn’t right for them.

If you are in a position where you are thinking about getting money from somewhere other than your regular source of income just to pay off your credit card debt or to pay it down “just enough,” you are thinking along the wrong lines.

Here are my personal “do not” rules for paying down credit card debt:

* Do not borrow money to pay off credit cards. “Borrowing money” includes things you might not normally think of as borrowing, like using your checking account’s line of credit or overdraft protection.

* Do not take money out of a retirement account to pay off credit cards. Especially do not cash out, or withdraw any money from, a 401k account – you will not only be cashing out part of your future safety net, but you will also be incurring a huge tax liability in the process. A tax liability that – by the way – is likely not dischargeable in bankruptcy.

* Do not spend money on a debt consolidation company (or a debt whatever company) to pay off credit cards. You would be spending extra money to just to repay money. Some people do this successfully, but the people who manage to pull this off already have sufficient income to pay off their debts eventually. And those people could probably pay off their debt without a debt consolidation company by reducing their expenses and making large enough payments toward their debt to pay it all off – and they can also call up the credit card companies themselves to try and negotiate better payment arrangements.

If you’ve looked at your income and found that you “have to” do one of these three things in order to pay off (or even to pay down) your credit cards over time, stop and consult a bankruptcy attorney. Do not dig yourself into a bigger financial mess by making one of these three mistakes.

Don’t make even bigger financial mistakes! If you are drowning in credit-card debt and can’t dig your way out, call me for a free bankruptcy telephone consultation at 201-676-0722.

Photo by MENE TEKEL.

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