Credit Card Debt FAQ

Find answers to top questions about credit card debt.

There are a lot of misconceptions about credit card debt and debt repayment. Not understanding how credit card debt repayment works, can lead to mistakes – added fees, penalties, collections and credit damage. The more you know, the easier it is to control your debt and pay it off.

You’re only responsible for someone else’s debt if it’s a joint account or you’re a cosigner. If you are not a joint account holder or cosigner, then creditors can make claims on the estate until the estate is settled. Money may be taken out of the estate to pay off the credit card debt. But once the estate is settled, creditors don’t have any claim to the money you inherit, and they can’t harass you to pay the debt.
No. If a collector threatens that they can send the police to your house if you don’t pay them, that’s actually a crime. They’re violating the Fair Debt Collections Practices Act. There’s no such thing as debtors’ prison – that hasn’t been a thing since the 1800s in the U.S.

A collector’s only recourse if you don’t pay a credit card debt is to sue you in civil court. At most, even if they win in court, the judge may order that the collector can garnish your wages or tax refund. They’ll never send you to jail.
Yes. This is known as a debt consolidation loan. The goal is to reduce the interest rate applied to your debt so it’s easier to pay it off faster. You’ll need at least a good credit score to qualify for an interest rate that provides the benefit you need. The funds from the loan are used to pay off your credit card balances.

You usually only consolidate up to $40,000-$50,000. Terms range from 24-48 months for most lenders. Rates tend to range from 8-12%. Any higher than that won’t really provide the benefit you need. The payments may be lower than your total monthly credit card payments, depending on how much you owe and the term you choose.
This depends on how much you owe. Lenders won’t approve you if your debt-to-income ratio is too high. Debt-to-income (DTI) measures your total monthly debt payments versus your total monthly income. The cutoff is usually 41-45%. So, if your DTI ratio will be higher than that with the new loan payments factored in, you won’t qualify.

Still, debt consolidation helps you pay off debt faster. That means it can help you get to qualifying faster if you have too much debt right now. And even if you enroll in a debt management program, you can still get approved for secured loans as long as your DTI meets the lender’s requirements.
When done correctly, consolidation should not hurt your credit score, even if you enroll in a debt management program. Getting out of credit card debt only hurts your credit score if you don’t repay everything you owe. Consolidation is about paying back everything you borrowed in a more efficient way. So, while settlement hurts your score, consolidation doesn’t.

That being said, there are ways to hurt your credit after you consolidate. If you don’t keep up with the payments or don’t closely follow the instructions on your debt management program, it can lead to negative remarks in your credit history.
Always thoroughly investigate any debt relief service provider before you sign anything! First, check the Better Business Bureau to see if the company has a rating. You only want to work with a company that has an A+ rating or better with the BBB. You should also check independent third-party review websites and consumer reporting sites.

Also, make sure you feel comfortable and confident in the team when you have your initial consultation. You should walk away from the free evaluation with peace of mind, not fear that you’re making the wrong decision. Finally, be wary of any settlement company that charges fees before the debt has been settled. This is against the law and is a sure sign of a scam!
Six, but they must be consecutive. You must make six payments on time in a row. After that, by law, any creditor must restore your original interest rate.
In most cases, this is a bad idea. First, you’re taking money out of an account that will be vital once you retire. You lose not only the money you take out, you lose the growth you would have enjoyed if the money was still there. It can set back your retirement plan significantly.

In addition, if you are below the age of 59½, you will get hit with early withdrawal penalties on a 401(k) or traditional IRA. You will also be charged taxes on what you withdraw, since it counts as taxable income.

These penalties and taxes do not apply to a Roth IRA as long as you only withdraw money you’ve contributed; you can face penalties and taxes on interest earnings.
If you fall behind on paying off a credit card balance, you generally have nine months to catch up before the debt gets charged off. Penalty APR typically gets applied after two months (60 days) without any payment.

Once the creditor charges it off, they freeze your account and usually sell it to a third-party collector. After that, there is a 10-year statute of limitations on collections. If you still don’t pay within those 10 years, collectors no longer have a legal right to sue you in court to force repayment.
Average APR currently ranges between 16-18%. Reward credit cards tend to have a higher APR – rates are often over 20%. If you have bad credit, your rates can be much higher.

If you have good credit and your rates are higher than the averages listed above, call your creditors. If your account is in good standing and you’ve always made your payments on time, then the credit card company may be willing to lower your rate.
If you’re carrying several credit card balances at once, you should start by paying off the debt with the highest APR first. High APR debts cost more with each month that you carry a balance. Paying off credit cards by highest APR first saves you money.

However, if your highest APR credit cards also have your biggest balances, you may choose to start with your lowest balance first. Knocking out a few low balances first will take bills off your plate and give you more cash to eliminate the biggest balances.