Debt Negotiation > Do It Yourself

DOOR NUMBER ONE: DO IT YOURSELF

This is most common strategy among consumers. Most people take the “Do-It-Yourself” approach to life’s problems. They only seek advice or help when things get out of hand. It’s no different when it comes to debt troubles. Unfortunately, for most people, this really becomes a “Do Nothing and Hope the Problem Goes Away” strategy. Our nickname for it is “The Ostrich Approach.” (By the way, ostriches do not actually stick their heads in the sand in response to danger, but … you get the idea.)

Please understand. We’re firm believers in self-reliance, and only YOU can decide when it’s time for some help. Maybe you really WILL win the lottery and everything will suddenly be okay. But more likely, if you’re only able to make minimum payments on your debts, with no immediate prospects for an increase of income that will enable you to pay off your debts at a faster rate, then you are on a slippery slope that leads to a financial cliff. “Doing it yourself” really becomes “doing yourself in.”

We’re going to go into a lot of detail in this section, simply because we need to prove to you that you probably don’t know as much about your own debts as you might think you do. With all due respect: You are an amateur, and you are up against professionals. So let us walk you through a typical credit card collection scenario. That way, you can get a feel for what you’re in for if you use the DIY approach:

Let’s say your total debt load is $25,000, spread over five different credit cards. To keep the math simple, let’s also agree that each card has reached the maximum balance of $5,000. So you are “maxed out” on each card. Let’s focus on one particular card, a Visa card from ABC BANK. You’ve had that credit card for ten years, and faithfully made your payments on time until recently. Let’s also assume that you have an honest and legitimate hardship situation that is making it very difficult for you to keep up with minimum payments.

The annual percentage rate is 20%, and your minimum monthly payment is 2.0% of the balance. That makes your minimum monthly payment $100, right? (You can check all these calculations against your own bills.) How much of that $100 is going toward the debt itself (also called the “principal”), and how much toward interest? Well, if the interest rate is 20%, then you’re paying an average of $83.33 in monthly interest charges! That’s right! Only $16.67 out of your $100 payment goes toward the debt itself.

Leaving aside the fact that it could take up to 25 years to pay off your debt at that rate (depending on how the bank computes the interest), you have a more immediate problem: you’ve exceeded the credit limit. At this point, you have three choices: (a) send in more than the minimum to ensure that the balance remains below the maximum credit limit, (b) call the bank to authorize an increase in your credit limit, or (c) pay the over-limit fees that will begin to accrue.

What most people do in this situation is to take each bill as payment comes due and then do the best they can at that point in the month. For the average person, it’s too stressful to think about $25,000 or more of debt all at once, so they consider each bill in turn.

ABC Bank’s statement asks for the usual $100 minimum payment, plus a $25 over-limit fee. You pay the $125, but now you’re $25 short on your monthly budget. So when the second credit card comes due later in the month, you’re short on the minimum payment. Why not skip paying the second card that month?

You go on this way, paying some of the minimums one month, others the next month. You’ve just set foot on that slippery slope into a downward spiral of financial desperation. Why? Because it is exactly at this point that your creditors turn against you and raise your interest rate!

So what does the normal “do-it-yourself” person do? They take action. They get on the phone and call the credit card bank. They try to negotiate a lower interest rate or a lower minimum payment or both. Banks are not managed by dummies. They will accommodate your initial phone calls by routing you to a Customer Assistance Team or some similar department. They will listen to your tale of woe, even though they couldn’t care less about you as an individual. Then they will—depending on how good you are at explaining your predicament—either attempt to shame or pressure you into making the regular payment, or they will try to implement something called a hardship program. Most people jump at the hardship plan.

Big mistake. They have you right where they want you. So let’s say that the bank agreed to waive the penalties and fees for six months, and that they also agreed to lower your interest rate to “only” 12%, down from the ridiculous 25% they bumped you to when you missed a payment. Most people would feel that they had accomplished something at this stage.

The truth? You’ve been tricked! Why? Let’s do the math.

After six months on the bank’s version of a “hardship program,” you’re right back where you started from. Oh, maybe you’re a little better off, but not by much. If your debt was $5,000 before you started missing payments here and there (while juggling the other over-limit card payments), and they lowered your rate to only 12%, you still have a big problem. Even with that lower interest rate, only $50 of your $100 minimum monthly payment goes to the principal, with the other $50 going to interest.

So, after six months (the maximum for most hardship programs) on the bank’s plan, you’ve brought the debt down from $5,000 to $4,700. Big deal! Unless you can make substantially larger payments after the six months are over, you’re just spinning your wheels. The minimum payment on $4,700 (at 2.0% monthly) is $94. Will that whopping $6 make any real difference to your monthly budget? It’s better than a poke in the eye, but not by very much.

There’s another problem. Most banks will only show mercy ONCE. After that initial “hardship” program has expired, the account reverts back to the original terms, and you won’t have a second chance at another assistance program. Tough luck!

So, if you’re feeling macho, and you simply have to “do it yourself,” best of luck to you!

Read about door number two: debt consolidation.