“So, as the title says. In total, between a few credit cards and a personal loan through Lending Club I owe about $25,000 in debt. Never missed a single payment in my life, never even been late with one. But my credit has gone way down simply due to the utilization ratio. Somewhere around 90% of my cards are maxed out and it’s dropped me down to a score of just a bit under 600. Simulations on Credit Karma say that If I can get it back under 30% I’d go up to somewhere between 720 and 780 though. So it’s really just my utilization causing me problems. And the insane interest rates on the cards are obviously making them super hard to pay off.

So I was shopping around for another personal loan like I got with Lending Club before but none of them want to help me anymore with my lower score.

Instead I keep getting companies trying to bait & switch me with these flashy “Debt Consolidation” plans.

So I just talked to one for a while (from Simple Path) and she explained all the benefits and advantages and how I’d be “debt free” from the start. Made it sound pretty enticing actually. Until she started telling me about how I’ll have to “ignore the harassment from my current creditors…”

She said I have to stop paying my cards and pay them instead and then eventually they pay off my creditors at a lower rate and at that point, then everyone’s happy again?

Like, is this a scam I’m being roped into? I want my credit to go back up, not get oddly manipulated by a random company that sent me a flyer…

Can someone give me some advice please? She’s calling me back tomorrow but do I have any better options without killing my payment streak?

I’ve seriously considered just walking into a bank and explaining my situation and trying to get a loan the old fashioned way but I don’t know if they will for someone with less than a 600 score. Even considered trying to get a car loan for something like a Porsche so I can pay off my cards and get something cheaper instead.

Or should I just stay on my grind and try to do this myself?

Sounds like a kinda nice deal considering she says the utilization rate is 50% impact compared to the payment history only being 10%. Like, if they actually get me out of debt and lower that utilization for me then my score could shoot up back to 700 like the personal loan did last year but at the same time I don’t want a bunch of missed payments on my history for life.

I just have to do something fast cause I can’t save any money for emergencies with these payments and have no space on the cards left to pay if it happens. That 25% interest rate is stressing me out to the max.

What’s my best option here to get out of debt and stay out forever? Gonna cut up most of the cards when they get paid off. Can’t wait.”

How do you get out of a $25,000 credit card debt?  

I’m going to assume that income is not the problem here as much as an out of control spending problem. In fact, if you read between the lines, this writer is more concerned about the decline of his credit score–i.e., about his ability to borrow more money–than he is about being $25,000 in debt.

Option 1: Credit Card Consolidation Loan:

This option may be valid if you have a really high credit score and can benefit from a loan that consolidates several high interest rate accounts into a single lower interest rate loan spread out over a longer period of time.  If a person can refinance $25,000 of credit cards with a minimum monthly payment of $800 to a lower interest rate loan requiring $500 per month, that is often a smart move.  But this borrower states that his credit score has dropped to below 600 and it is doubtful that an affordable consolidation loan is available.

Option 2: Debt Settlement Company.

The borrower was rightly concerned about the flashy claims of a debt settlement company. These programs almost never work. The idea that you can simply stop paying on credit cards and settle the accounts for pennies on the dollars is just a lie. Most credit card companies will start legal proceedings once an account has become more than 6 months delinquent, so unless you have saved up a minimum of one-third of the credit card debt within 6 months of stopping payments, the settlement program is doomed to failure. However, at first the program seems like it is working, especially when these flashy companies settle small balance accounts in the first few months. But in time you realize the program will fail as you begin to be sued and garnished for the unpaid accounts.  Debt settlement is a real debt solution, but only if you have cash on hand to settle the account.  Starting from zero savings to settle $25,000 of debt is just not realistic.

Option 3: Debt Management Plan.

This is the most realistic option for this debtor.  Under a reputable debt management plan (DMP) sponsored by a National Foundation for Credit Counseling member, such as GreenPath (formerly known as Consumer Credit Counseling Services of Nebraska), credit card debts are consolidated into a monthly payment plan that reduces interest rates to about 8%.  Since the debtor’s current credit score is less than 600 he is unlikely to find a loan offering such a low interest rate and this is his best option to get out of debt.

However, 60% to 75% of debt management plans fail, unusually because the debtor cannot afford the monthly payment. Credit counselors, who are trying to make a buck themselves, tend to enroll too many clients into payment plans they cannot afford.  What most debtors lack is an emergency savings account, and without such savings these payment plans tend to crash and burn.  So, enrollment into a DMP should be limited to those who can afford the payment and who have emergency savings that they continue to build each month.  As a general rule, do not enter a DMP until you have $1,000 in savings.

Option 4: Stop paying credit cards until they agree to lower the interest rate.

This option is not used enough. There is really nothing a credit counseling agency does that you cannot do yourself if you have the courage to stop paying the credit cards until the bank agrees to lower the interest rate. Banks will not lower rates or offer special payment plans until the account is in default. So, sometimes skipping a payment or two will “wake up” the bank and force them to take your debt problem seriously. Obviously, such radical action will cause your credit score to drop dramatically, but you can demand that you will not resume payments until their negative reporting is removed and the account is shown to be in good standing. I’ve seen banks completely drop all interest charges and rewrite accounts to fixed payment debts once the borrower got tough and refused to pay until a satisfactory payment agreement was reached.

Option 5: Consider bankruptcy options.

This particular debtor seems to have income that would allow him to repay his debt, but sometimes that picture is unclear.  What makes him able to repay the debt? Is he paying his student loans or is he deferring them? The practice of deferring student loan payments until credit cards are paid is very unwise since credit card debts may be discharged in bankruptcy but student loans generally cannot be discharged. Is the debtor saving for retirement in his 401(k) plan? A lot folks say they can afford to pay their debts, but really this is only true because they are not saving for retirement or they have no health insurance or they are deferring student loan payments.  If that is the case, perhaps bankruptcy may be the wiser choice since a bankruptcy budget does allow for retirement savings, health insurance premiums and student loan payments.

Image courtesy of Flickr and CreditCafe.com