The goal for many years was to enter retirement with no debt, and if you did carry debt, to ensure it fit well within your fixed income from Social Security, a pension, and/or required minimum distributions (RMDs). For most, that well-meaning goal has gone the way of the Pet Rock. Given today's cost of living, retirees are turning to credit cards to help them make ends meet.
According to a recent study by LendingTree, credit cards are the most common type of non-mortgage debt among adults ages 66 to 71. The study revealed that 92.6% of adults aged 65+ carry a credit card balance.
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Key strategies for getting credit card debt under control
By the time you claim Medicare, you've lived long enough to know that, for nearly every problem, there's a solution. The situation you're currently faced with doesn't have to continue forever.
1. Adopt a payoff strategy
Consider adopting either the "snowball method" or the "avalanche method" to pay off your credit card debt. Here's a rundown of how they work:
Snowball Method
- Make a list of your credit card debt, from the smallest balance to the largest.
- Decide how much extra you can spare a month, even if it's only a little. The point is to chip away at one debt at a time.
- First, focus on the smallest debt while continuing to pay the minimum payment on each of the other cards.
- Apply the extra money you found to the minimum payment on the card with the smallest debt.
- Once that card is paid off, roll the money you were paying toward it over to the credit card with the next-lowest balance.
- As you repeat the process, the amount you're paying toward debt grows larger, like a snowball rolling down a hill.
Avalanche Method
Make a list of your credit card debt, from the highest interest rate to the lowest.
- Decide how much extra you can spare.
- First, focus on the credit card with the highest interest rate and continue making the minimum payment on each of the other cards.
- Apply the extra money to the minimum payment on the card with the highest interest rate.
- Once that card is paid off, roll the money you were paying toward it over to the credit card with the next-highest interest rate.
- Repeat the process until all debts are paid off.
2. Negotiate with credit card companies
Whether you're unable to make payments or making them at the expense of paying other bills, it may be a good idea to contact the credit card companies. If you're not comfortable making the calls yourself, some credit counseling agencies will do it on your behalf, although most charge a fee for the service.
If you decide to call on your own, here's how to approach it:
- Prepare your information: Gather your account details, including account number and balance. Also, review your budget to determine how much you can realistically afford to pay each month toward the debt.
- Be polite: The person on the other end of the line is human and undoubtedly understands what it's like to try to keep up with bills. Be respectful to them, even if they seem unreceptive at first.
- Explain your situation: Briefly explain why you're seeking to lower your bill. For example, if you've lost a part-time job, are dealing with expensive medical debt, or going through a divorce, personalize your situation by explaining what's going on.
- Make a request: For example, you can ask the company to lower your interest rate, waive late fees, or set up a payment plan you can afford.
- Be open to counteroffers: If the representative says they can't honor your request, ask if they have any suggestions. Let them know that you want to keep up your end of the bargain but need them to meet you halfway.
- After an agreement is made: Don't make any payment until you've received a copy of the agreement in writing. Before hanging up, make sure you know the person's name and phone extension.
- If you don't receive a copy of the agreement: Follow up with the agent you worked with.
Preserve your retirement funds
When you're in debt, it may be tempting to tap your 401(k) or IRA for the funds to pay it off. This path has several serious issues:
- You may be hit with a larger tax bill than you anticipated for the year.
- Making an unexpected withdrawal could push you into a higher tax bracket.
- Taking money from your portfolio for any purpose other than required minimum distributions (RMD) or paying everyday expenses means losing crucial compound growth and potentially leaving yourself short later in retirement.
Credit card debt has become a way of life in the U.S., but that doesn't mean you have to remain mired in it.
