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Managing Your Debt

Average U.S. Credit Card Debt Statistics

The average credit card balance per person in the United States was $6,194 in 2019—an increase of 3% compared to 2018, according to Experian’s annual Consumer Credit Review.1

Credit card debt is a common issue in the U.S. More than two-thirds of Americans have credit cards, and it’s the fastest-growing type of debt in the U.S. after personal loans.1 American consumers ended 2019 with a total of $4.2 trillion in debt not related to housing—much of which can be attributed to credit cards.2

Credit card debt is the portion of your credit card balance that you have not paid off. It’s also considered revolving debt. This type of debt usually involves accounts that allow you to carry a debit balance and have predetermined credit limits, variable interest rates, and payments that are calculated as a percentage of the unpaid balance.

States With the Most and Least Average Credit Card Debt

The average amount of credit card debt that people have can vary based on location.

People living in Alaska had the most credit card debt in 2019, with an average of $8,026 per person. Residents of New Jersey had the second-highest amount of average credit card debt, at $7,084, followed by Connecticut at $7,082.

The state with the least amount of average credit card debt per person in 2019 was Iowa, at $4,744. Wisconsin had the next to last, with an average of $4,908, followed by Mississippi at $5,134.3

Causes of Credit Card Debt

Credit card debt isn’t just a result of careless spending and shopping, although those can be contributing factors.

Many people in the U.S. build up credit card debt because they’re having trouble covering their basic living expenses and bills.

Medical Bills

Many people reach for their credit cards to help them pay unexpected medical bills and unavoidable health care costs.

Daily Living Expenses

Some people don’t earn enough to cover the cost of living, so they need to pay for things like groceries and monthly bills with credit cards—and often can’t pay off their monthly statement in full.

Home and Car Repairs

A car can break down unexpectedly, or a leaky pipe or roof can cause damage. These are often a cause for people to pull out the credit card, especially if they aren’t prepared with an emergency savings account.

Vacation and Shopping

People who earn more money tend to carry higher balances on their credit cards for things like shopping and traveling because they tend to have higher credit limits. On top of that, many retailers offer store credit cards as a convenience to their customers, making it even easier to rack up credit card debt while shopping online or in-person.

Interest Charges

Interest can start to build when people carry balances on their credit cards, making debt situations even worse. According to Experian, in 2019 the average American household carried $6,194 in credit card debt.4 Meanwhile, according to The Balance’s June 2020 Average Credit Card Interest report, the average credit card interest rate stood at 20.09%. That means households in the U.S. can expect pay an average of around $1,250.00 in credit card interest charges this year.

One quick way to tally up what you’re paying in interest every year is to plug your credit card balance and interest rate into our loan calculator:Calculate Your Monthly Payment

Your monthly payment for a personal loan will depend on the amount, term, and interest rate of the loan (which is highly dependent on your credit score). Use the inputs below to get a sense of what your monthly payment could end up being.ENTER LOAN AMOUNT$SELECT LOAN TERM                  12 months (1 year)                              24 months (2 years)                              36 months (3 years)                              48 months (4 years)                              60 months (5 years)             ENTER INTEREST RATE Or Estimate with Credit Score%ORChoose Your Credit Score                  Excellent (800+)                              Very Good (740-799)                              Good (670-739)                              Fair (580-669)                              Poor (-580)             Total Paid$18,719.28Total Interest Paid$3,719.28Loan Amount$15,000MONTHLY PAYMENT$519.98

Credit Card Debt and Credit Scores

Credit card debt doesn’t always mean a lower credit score—especially for people with accounts in good standing.

Even though the average amount of credit card debt in the U.S. increased from 2018 to 2019, so did the average credit score. The average FICO score was 701 in 2018 and rose to 703 in 2019. And the average FICO score for people with credit cards in 2019 was 727—which is considered very good.1

Many factors beyond debt go into calculating a credit score, including payment history, length of time using credit, percentage of spending limit used, credit mix, and the number of new credit accounts or inquiries.

In general, it’s best to use less than 30% of your credit limit to avoid negatively impacting your credit score.

If someone has the average $6,194 of credit card debt but has a $7,000 spending limit, then it’s likely that their credit score will be lowered because they’re using a large percentage of their limit. On the other hand, if another person has the same $6,194 in credit card debt but has a $40,000 spending limit, then it’s likely that their score will not be impacted too negatively by this debt.5

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.

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Managing Your Debt

5 Ways Debt Consolidation Can Hurt Your Credit

If your credit card bills are piling up and you just can’t juggle anymore, a balance-transfer card or loan can consolidate your debt. Combining your outstanding balances can simplify repayment, reduce stress, and most importantly, save you money on interest over time. But this approach can ding your credit in the short-term, and there are pitfalls if you’re not careful. Some can have lasting effects on your credit health.

Here are five ways debt consolidation can hurt your credit:

1. Hard Inquiries Ding Your Credit Report 

When you apply for a new credit account to consolidate debt, the lender will check your credit, leading to a so-called hard inquiry on your credit report.

Each hard inquiry can temporarily lower your credit score by up to five points because lenders look at new credit applications as a sign of risk. To avoid a big hit, only apply for a loan or balance transfer card you can qualify for. Don’t apply for new accounts left and right and cross your fingers for approval. Multiple hard inquiries in a short period of time will definitely hurt, and the records may be a red flag to future lenders.

Check your credit score before applying and take note of how your score is categorized: Is it considered fair, good or excellent? Use that information to guide your loan or credit card selection.

On the plus side, if you are consolidating debt, you likely won’t (and shouldn’t) open another new line of credit any time soon, so a temporary dip in your credit score may not matter. (And fortunately, inquiries only affect your score for a year.)

2. New Accounts Lower Your Average Credit Age

Opening a new credit card or taking out a loan for debt consolidation will lower the average age of all your credit accounts, which may also temporarily lower your credit score.

The length of your credit history makes up 15% of your FICO credit score and, specifically, factors in the age of your newest account. A brand new account doesn’t yet have a positive credit history, so your score will benefit as you make on-time payments and the account ages.

While some situations can’t be avoided, the next three scenarios definitely can be. Pay close attention so you know what not to do after consolidating your debt to keep your credit score on the up and up. 

3. Racking Up More Debt After Consolidation

One of the biggest risks associated with consolidation is running up new debt before you’ve paid off your old balance. If you succumb to the spending temptation of a newly paid-off credit card, any credit score improvements you see will quickly disappear.

Here’s why: When you consolidate your debt into a new account to pay off other cards, your overall amount of available credit increases, lowering your credit utilization ratio. The lower that ratio is, the better your FICO credit score will be. (It accounts for 30% of your score.)

But, if you don’t leave those credit limits alone on your older cards, you’ll get yourself in trouble again. Here’s an example of how piling new debt on top of consolidated debt will increase your credit utilization ratio and be a drag on your score:

Card & Credit LimitBalance After Debt ConsolidationBalance After Debt Consolidation + New Debt
Card No. 1: $2,000 limit$0$500
Card No. 2: $3,000 limit$0$1,200
Card No. 3: $5,000 limit$0$2,000
Card No. 4: $15,000 limit
(balance transfer card used for consolidation)
$7,000$7,000
Credit Utilization Ratio:28%43%

Reign in your spending habits, or you’ll be juggling multiple debts again, including a large consolidated debt account. This could quickly overwhelm your budget and lead to late payments, or worse—default. 

4. Closing Old Credit Cards

If you’ve been spooked by the previous warning, don’t go too far to restrain your spending. That is, don’t go as far as to close those old, balance-free credit cards. That will actually hurt your credit score. 

By keeping the cards open and paid off, you will reduce that oh-so-important credit utilization ratio we just discussed, positively impacting your credit score. Close the cards and your credit score will take a hit.

Here’s an example of how closing unused credit cards could raise your credit utilization ratio, using the same four credit card scenarios: 

Card & Credit LimitBalance After Debt ConsolidationBalance After Debt Consolidation + Closing Cards
Card No. 1: $2,000 limit$0N/A
Card No. 2: $3,000 limit$0N/A
Card No. 3: $5,000 limit$0N/A
Card No. 4: $15,000 limit
(balance transfer card used for consolidation)
$7,000$7,000
Credit Utilization Ratio:28%47%

See how those empty cards can work in your favor while you pay off that balance-transfer card?

Instead of closing unused cards, tuck them away while you pay down the consolidated debt balance. If you’re likely to buckle, lock the physical cards in a safe, or freeze them in water. Make sure you remove all automatic payments from those cards and clear saved card details from any online shopping accounts to eliminate further temptation.

If overspending is a serious concern and your budget is already under pressure, closing empty cards may be in your best interest after all. Your score may dip temporarily, but you can more easily bounce back from that kind of a hit than from more suffocating debt. Just make sure to close cards with caution

5. Being Late or Missing Payments

It’s absolutely crucial that you make all your debt consolidation payments on time each month until the balance is repaid. Payment history has the biggest influence on your FICO score, and records of late payments will damage it.

If you ignore the debt consolidation balance and stop making payments altogether, your account will become delinquent and the lender will send it to collections. Collection records stay on your credit report for seven years and until that time passes, your credit will suffer immensely.

If you are suddenly facing financial difficulties and worried you’ll miss a consolidated debt payment, call your credit card or loan issuer before your payment is due and your credit score takes a hit. There may be financial hardship options available.

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Managing Your Debt

10 Signs You Have Too Much Debt

If you’re struggling to make debt payments or your payments are so high that you can’t accomplish much else, you may have too much debt. Even if you can manage your payments, having too much debt can lead to other financial problems like not being able to save money, missing bill payments, and having to borrow more money just to stay afloat. Here are a few signs you have more debt than you can handle.

You Don’t Know How Much You Owe

A man is drowning in bills
© Claus Christensen / The Image Bank / Getty

Hiding from your debt doesn’t make it go away. In fact, if you’re purposely ignoring your debt, you may suspect that you have more debt than you can handle and you’re simply afraid to face up to it.

Pull a copy of your credit reports and your most recent account statements from your creditors to make a list of your accounts and the current balance. This will tell you the exact amount you owe.

Lack Of Money Leads to Late Payments

If your debt payments are higher than your income, it’s a sure sign that you have too much debt. Not having enough money for your monthly payments means you miss payments from time to time, which makes your debt problems worse. Paying late triggers late payments and higher interest.

Taking a close look at your monthly spending can help you figure out what you can eliminate to better afford your bills.

Dodging Phone Calls From Bill Collectors

When debt collectors start calling you, your debts have become delinquent and probably unaffordable. You may be able avoid debt collector phone calls for awhile, but don’t underestimate your creditors and debt collectors—they may decide to sue you for what you owe. If the creditor wins the lawsuit, they may be able to get court permission to garnish your wages or levy your bank account.1

Borrowing Money to Pay Back Your Debts

If you have to pay your bills with loans from family, friends, credit cards, or cash advance places, you have too much debt. You’ll eventually run out of places to borrow money and you’ll have to face the debt you’ve accumulated with your creditors and your loved ones.

Reducing your bills or increasing your income will make it easier to afford your expenses without having to borrow money.

Losing Sleep Over Financial Worries

Are you so worried about your bills that you can’t sleep at night? Do you toss and turn fretfully wondering how you’re going to pay the bills? That’s a sure sign that your debt has gotten out of control.

Debt-related stress can lead to other medical problems. Making a plan to deal with your debt can eliminate stress and in some cases, literally save your life.2

Your Finances Affect Your Work Performance

When your financial woes spill into the workplace, it’s time to do things differently. Losing your job is the last thing you need right now because a loss in income could put you over the financial edge.

You’ve Drained Your Savings

The absence of savings itself doesn’t always mean you have more debt than you can handle. If you drained your savings trying to pay off your debt or to make ends meet, that’s when you know there’s a problem.

Not having access to savings puts you at risk of increasing your debt in the event of a financial emergency.

You Look for Ways to Escape Financial Stress

Many people use drugs and alcohol to avoid facing up to their debt. The high cost of drugs may have even contributed to your debt. Getting treatment for substance abuse will be one of the first steps you have to take if you want to get out of debt for good.

You Need Credit to Survive

When you have to buy groceries with a credit card, it’s a sign of a deeper issue – you don’t have enough money to sustain your lifestyle. You may not make enough money at all or you could be mishandling the money you are making. Either way, you have to figure out how to survive on the income you make or increase your income.

You’re Hiding Your Spending

If you can’t be honest with your loved ones about your debt, chances are you have too much of it. You may even hide it because you’re afraid they’ll stop you from spending, which might be a sign of that you’re addicted to debt.

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Managing Your Debt

What Happens to Credit Card Debt When You Die?

Death is one of those unpleasant certainties in life. With credit card debt, you may have additional anxiety about how debts are handled after your death. You may worry about who is responsible for repaying the debt or if the loan will be forgiven upon your death.

The simplest answer is that credit card debt is the borrower’s responsibility—not anybody else’s—especially when borrowing individually. But real-life situations are more complicated. What’s more, lenders can cause confusion and panic when they tell friends and family to use their own money to pay off somebody else’s debts.

Your Estate Pays Debts

Your estate is everything that you own when you die, such as money in bank accounts, real estate, and other assets. After death, your estate will be settled, meaning anybody you owe has the right to get paid from your estate, and then any remaining assets will be transferred to your heirs.

Lenders have a limited amount of time to collect on debts. Your personal representative—the executor—should notify creditors of your passing. It can happen through a published announcement or through a communication sent directly to the lenders. Then, debts are settled until all debts are satisfied, or your estate runs out of money.

Different Types of Debt

When it comes to paying off debts after your death, the type of debt will matter. Again, there’s a priority to which debts get paid off and how they will get paid. Credit card debt is relatively low on the list.

Personal Loans

Credit card debt is a form of personal loan, and most other personal loans are handled similarly. No collateral is required to secure the loan, so lenders have to hope that the estate will have sufficient assets to repay the debt.

Student Loans

Student debt is also unsecured in most cases. However, these loans are sometimes discharged (or forgiven) at the death of the borrower. Especially with federal loans, which are more consumer-friendly than private student loans, there’s a good chance that the debt can be wiped out.1 Private lenders can set their own policies.

Home Loans

When you buy a home with borrowed money, that loan is typically secured with a lien against the property. That debt needs to be paid off, or the lender can take the property through foreclosure, sell it, and take what they are owed. Second mortgages and home equity loans leave you in a similar position. Federal law makes it easier for certain family members and heirs to take over home loans and keep the family house, so don’t expect the lender to foreclose immediately.2

Auto Loans

Auto loans are also secured loans where the vehicle is used as collateral. If payments stop, the lender can repossess the car. However, most lenders simply want to get paid, and they won’t repossess if somebody takes over the payments.

Paying Debts After Your Death

If your estate does not have enough assets to cover all of your debts, lenders are out of luck. For example, if you have $10,000 in debt and your only asset is $2,000 in the bank, your lenders will write off any unpaid balance and take a loss.

However, your estate includes things like your home, vehicles, jewelry, and more. Any assets that go to your estate are available to satisfy your creditors. Before distributing assets to heirs—whether following instructions in a will or following the state law—your personal representative is responsible to ensure that all creditor claims have been handled. If there’s not enough cash available to pay off all the bills, the estate may need to sell something to generate cash.

It’s possible that an estate will have to sell the home to pay credit card bills and other debts. However, state law determines what actions are available to creditors. In many cases, local courts decide if the estate needs to sell a home or if liens can be placed on the home.

Non-Probate Property

Only property in the estate is available for paying off debt. Assets can, and often do, pass to heirs without going through probate or becoming part of the estate. Probate is a costly and time-consuming process.

When assets skip probate, they are not required to be used to pay off debts. Creditors generally cannot go after assets that go directly to heirs, although there are some exceptions. For example, the death benefit from a life insurance policy is ordinarily protected from creditors.3

Designated Beneficiary

Certain types of assets have a designated beneficiary or specific instructions on how to handle assets after the account owner’s death. A beneficiary is a person or entity chosen by the owner to receive assets at death.

For example, retirement accounts—like an IRA or 401k—and life insurance policies offer the option to use beneficiaries. With a proper beneficiary designation, assets can pass directly to the beneficiary without going through probate. The beneficiary designation overrides any instructions contained in a will. The will doesn’t matter because the will only apply to assets that are part of the estate, and beneficiary designations allow you to bypass the estate entirely.4

Joint Tenancy

One of the most common ways that assets avoid probate is a joint tenancy with rights of survivorship. For example, a couple might own an account as joint tenants. When one of them dies, the surviving owner immediately becomes the new 100 percent owner.5 There are pros and cons to this approach, so evaluate all of the options with an attorney—don’t just do it to avoid paying off debts.

Other Options

There are several other ways to keep assets from going through a probate that include trusts and other arrangements. Speak with a local estate planning attorney to find out about your options.

Marriage and Community Property

The estate pays off debt before a property is passed on to heirs. It can be confusing if somebody expects to inherit a particular asset. The asset has not yet changed hands, and it might never go to the intended recipient if it needs to be sold. Unfortunately, for heirs, it feels like they’re paying off the debt, but technically the estate pays.

In some cases, a surviving spouse may have to pay off debts that a deceased spouse took on—even if the surviving spouse never signed a loan agreement or even knew that the debt existed. In community property states, spousal finances are merged, and this can sometimes be problematic.

Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Alaska residents can choose community property treatment as well. Check with a local attorney if you’re faced with paying a deceased spouse’s bills. Even in community property states, there are opportunities to have some debts wiped out.6

Shared Accounts

In some cases, relatives and friends are required to pay off debts for a borrower who has died. It is often the case when multiple borrowers are on an account.

Joint Accounts

Some accounts are opened by more than one borrower. It is most common with married couples, but it can happen in any partnership (including business-related partnerships). In most cases, each borrower is 100 percent responsible for the debt on a credit card. It doesn’t matter if you never used the card or if you share expenses 50/50.

Co-Signing

Co-signing is a generous act because it’s risky. A cosigner applies for credit with somebody else, and the cosigner’s good credit score and strong income help the borrower get approved. However, cosigners don’t get to borrow—all they do is guarantee that the loan will get repaid. If you cosign and the borrower dies, you’re generally required to repay debt. There might be a few exceptions (for example, the death of a student loan borrower might trigger a discharge—or other complications), but cosigners should always be willing and able to repay a loan.

Authorized Users

Additional cardholders are typically not required to pay off credit card debt when the primary borrower dies.6 These individuals were simply allowed to use the card, but they don’t have a formal agreement with the credit card issuer. As a result, the credit card issuer typically cannot take legal action against an authorized user or damage the user’s credit. That said, if you’re an authorized user and you want to take over the card (or card number) after the primary borrower dies, you can often do so. You’ll need to apply with the card issuer and get approved based on your own credit scores and income.

Don’t defraud lenders. For example, if it’s obvious that death is imminent and the deceased will not have any assets to repay bills, it may be tempting to go on a shopping spree. If the courts decide that this was unethical, an authorized user might have to pay off the debt.

When Debt Collectors Call

Handling debts after a death can be confusing. In addition to the emotional stress and the endless tasks that need attention, you’ve got a confusing set of debt collection rules to contend with.

Collectors can often call family and friends of a deceased borrower to collect on outstanding debts. The rules vary from state to state. Lenders are not supposed to mislead anybody who’s not required to repay a debt. The law only allows this type of contact to enable lenders to get in touch with the person handling the deceased’s estate (the personal representative or executor).7

Request that all communication come in writing, and avoid providing any personal information—especially your Social Security Number—to debt collectors. If collectors come to your house, you can ask them to stop.

Some collectors will try to mislead loved ones in an effort to collect on debts. They may try to make them think that they need to repay the debt. Most debt collectors are honest, but there are certainly some bad apples out there. If you’re not responsible for a debt, refer lenders and debt collectors to the personal representative handling the estate. With persistent collectors, request—in writing—that they stop contacting you.

If assets pass to you, they are probably not fair game for collectors to seize. Assuming the personal representative and financial institutions handled things properly, your inherited assets should be beyond the reach of creditors. However, check with an attorney when in doubt.

Get legal help if someone asks you to pay off credit card debt for a deceased person. Collectors are often confused and eager to simply collect. Sometimes they’re even dishonest. Don’t assume that you’re liable just because somebody says you are.

Planning for Your Estate

If you have credit card debt, it’s wise to plan ahead—you can make things easier on everybody at the time of your death.

Estate planning is the process of planning for death, and it’s a good idea for everybody—rich or poor. During that process, you’ll cover important topics such as your will, medical directives, final wishes, and more. It’s also possible to get more complex and use methods like irrevocable trusts to manage assets after you pass away.

Life insurance can help pay off debt when you die. Especially if somebody else will be responsible for your debt, life insurance protects your loved ones. It can be used for any purpose, including paying off credit card debt or home loans—including home equity loans.

Simplify your finances before you die. Things will be much easier for your executor. If you have numerous unused accounts open, consider closing them. However, beware of any consequences to your credit. Loans scattered around can potentially be consolidated into one place, and you might even save money on interest.

When assets pass to a designated beneficiary, they can bypass probate, and they’re not available to creditors. The same may hold true for a joint account with rights of survivorship. However, if you have no living beneficiaries, the assets may wind up going to your estate. Check with your retirement account custodian and life insurance provider company to find out what their rules are for beneficiaries. It will vary from company to company. Once assets are in your estate, they may have to go towards paying down debt. Review your beneficiary designations periodically to make sure they still make sense.

Executors Handle Paying Off Debts

If you’re the executor of an estate—or the personal representative or administrator, depending on the situation—it is important to handle a deceased borrower’s debts correctly.

Be sure to get additional copies of the certified death certificate. You’ll need to provide notice to numerous organizations. Requirements for a “copy” of the death certificate will vary, but it’s best to have official documents from your local Vital Statistics Department—get more than you think you’ll need.

Reach out to creditors and let them know the borrower has passed away. Check with a local attorney to ensure that you’ve provided sufficient notice (you might not be aware of all creditors, so you’ll need a way to get the information out to unknown lenders). Notifying creditors also prevents somebody from racking up debt in the deceased person’s name.

Be sure to notify the Social Security Administration of the death as well. It can help prevent identity theft and other complications, and it may be helpful for creditors.

Pull a credit report for the deceased. Use this report to identify lenders that may need to be notified of the borrower’s death. Even if the borrower has a zero balance, notify all potential lenders—you don’t want a credit card (or credit card number) out there available to thieves.

If you have any doubts, be sure to work with an attorney. The price you pay can help you avoid expensive and time-consuming mistakes.

If the estate does not have enough money to pay every creditor with a claim, you’ll have to prioritize debts—using state law as a guide for ordering the list. Wait until you know about all claims before you start making payments. Credit card debt is generally relatively low on the list (while taxes, final expenses, and child support take a higher priority).

Be sure to wait to distribute assets. Make sure that all claims are paid in full before giving heirs any of the remaining estates. Nobody wants to make heirs wait, but it’s essential to get all of the details correct. As an executor, you’re not responsible for paying the deceased’s debt out of your own funds, but you can be held personally liable if you make a mistake and fail to pay a valid claim.

When in Doubt

Get help if you’re not sure how to handle a situation—there’s nothing wrong with doing so. The deceased chose you based on your judgment, and you can decide that professional assistance is required (and the heirs will just have to deal with that).

Settling an estate after death is a complex process. The emotional toll of losing a loved one only makes it harder. Professional help from local attorneys and accountants can guide you through the process and make sure things don’t get worse.

The information contained in this article is not tax or legal advice and is not a substitute for such advice. State and federal laws change frequently, and the information in this article may not reflect your own state’s laws or the most recent changes to the law. For current tax or legal advice, please consult with an accountant or an attorney.

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Managing Your Debt

Go Through Credit Counseling

Some companies specialize in negotiating with creditors on your behalf. Debt management plans through these credit counseling agencies typically last four to six years.9 Your debt won’t disappear overnight, but you may get a lower interest rate. The credit counseling agency will handle your debt payments, so if you send in any extra payments, you’ll have to tell the agency which debt to put the extra payment toward. This is basically the snowball method of paying off debt, except the credit counseling agency is managing your payment.

These debt settlement plans can come with serious strings attached, so read the fine print carefully before agreeing to work with an agency. The Consumer Financial Protection Bureau has tips and warnings for those considering a debt settlement plan.

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Managing Your Debt

Settle With Your Creditors

Debt settlement may be a solution if your accounts are past due or you owe more money than you could repay over a few years. When you settle your debts, you ask the creditor to accept a one-time, lump-sum payment to satisfy the debt. Creditors who agree to a settlement offer also agree to cancel the rest of the debt, but they typically only accept these offers on accounts that are in default or at risk of defaulting.

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Managing Your Debt

Cash out a Life Insurance Policy

You may have accumulated some cash in your whole or universal life insurance policy that you can put toward your debt. Like tapping retirement funds, this is a risky strategy that can come with tax consequences.7 Borrowing from your insurance policy is also an option, but it may affect the death benefit your beneficiaries will receive.

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Managing Your Debt

Withdraw From Your Retirement Fund

In extreme cases, you may consider pulling money from your retirement account to pay off your debt. Beware, if you’re not at least 59½, you’ll face early withdrawal penalties and additional tax liability. The specific penalty you’ll face depends on the retirement account you draw from and how you spend the money, but the standard early withdrawal penalty is a 10% tax.5 Plus, when retirement comes around, your savings will be short—not only from the money you withdrew but also from the interest, dividends, and capital gains you could have earned with that money.

It’s possible to borrow from work-sponsored retirement plans, such as a 401(k). However, this strategy comes with risks, as well. If you leave your job, you’ll have to pay back the loan on an expedited timeframe that could worsen your debt problems.

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Managing Your Debt

Look for Ways to Put More Money Towards Your Debt

The more money you put toward your debt, the faster you can pay off your debt for good. If you don’t already have one, create a monthly budget to better manage your money. Seeing all your expenses detailed in a budget can also help you figure out how you could cut out some expenses and use that money for your debt. You may also be able to come up with extra money for debt by selling things from your home or generating income from a hobby.

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Managing Your Debt

Ask Your Creditor for a Lower Interest Rate

Higher interest rates keep you in debt longer because so much of your payment goes toward the monthly interest charge and not toward your actual balance. However, interest rates can be negotiable, and you can ask your credit card issuers to lower your interest rate.4 Creditors do this at their discretion, so customers with good payment histories are more likely to successfully negotiate lower rates.

You may be able to find a lower interest rate by seeking out promotions. If you use a balance transfer to get a lower rate, try to pay off the balance before the promotional rate expires. After that promotional period, your balance will be subject to higher interest rates.