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This is another example of how the economic recovery from the pandemic has been uneven: while overall credit card debt is downothers see their balances grow into colossal numbers.
Money Management International, a nonprofit credit counseling agency, recently analyzed the credit card balances of tenants who requested financial assistance from the organization. Renters have been particularly hard hit by the pandemic, and federal aid allocated by Congress to deal with their crisis has been painfully slow in reaching households. More than a third of Americans are tenants.
The typical renter seeking the agency’s help was carrying around $3,000 in credit card debt in 2019, Money Management International found. The average balance so far in 2021 is closer to $25,000.
Other agencies that help people in financial difficulty report the same.
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“We see people who have $20,000, $30,000 and $40,000 in credit card debt,” said Bruce McClary, spokesperson for the National Foundation for Credit Counseling.
Balances this high can take decades to be paid off, experts say.
If someone made only the minimum monthly payments on a credit card with a balance of $25,000, charging the average annual rate of 16.22%, it would take almost 30 years to become debt free, and he will have paid over $32,500 in interest by the end, according to an example provided by Ted Rossmanindustry analyst at CreditCards.com.
The minimum payment on this balance would start at around $588 per month and decrease over time as the balance decreases.
One way to speed up repayment, Rossman said, would be to continue paying the initial, higher minimum payment.
“That would bring their payment period down to just over five years,” he said. “And their interest charges would be $12,443.”
For people who owe such large balances, Rossman recommends contacting a nonprofit credit counselor. International Financial Management, GreenPath and other members of the National Foundation for Credit Counseling are options.
“They can provide helpful advice and negotiate with creditors on your behalf,” Rossman said.
For example, he said it’s common for people to get a more manageable repayment plan, through credit counseling, “something like a 7% interest rate over five years.”
Under these fixed terms, someone making payments on a balance of $25,000 would be out of debt in five years and would only pay $4,700 in interest.
Be prepared for some credit counselors to charge a fee for their help, though those costs are usually worth it when you consider the interest they can save you from paying, experts say.
Another option for people with good credit is to take out a personal loan to pay off your credit card debt, Rossman said.
You will still be required to make monthly payments, but hopefully for less time, as interest rates on personal loans can be as low as 5% or 6%compared to annual fees of 16% or more on credit cards.
Those with good credit may also be able to transfer their debt to a 0% balance transfer card.
These cards offer you a certain number of months during which no interest is charged. If you found one with a period of 20 monthsand paid $1,250 per month, for example, your $25,000 balance would be gone in less than two years.
“Just beware that the interest rate changes from 14.49% to 24.49% after the 0% promotion ends,” Rossman said.
Many are also likely waiting for the economic recovery to hit them so they can meaningfully settle their debts.
“More often than not, the people we see are struggling financially far beyond their control,” McClary said. “Much of the spending that takes place is out of necessity.”